What is inventory turnover?
Inventory turnover measures how many times a company sells and replaces its inventory during a period. It is calculated by dividing the cost of goods sold (COGS) by average inventory. A higher turnover ratio generally means the business is selling inventory efficiently and not holding excess stock.
What is a good inventory turnover ratio?
Inventory turnover benchmarks vary significantly by industry. Grocery and food retail may turn inventory 20-30x per year. General retail typically runs 4-8x. Manufacturing is often 4-6x. A ratio below 3x in most industries signals slow-moving inventory that ties up working capital and increases storage costs.
What is Days Sales of Inventory (DSI)?
DSI (also called days inventory outstanding or DIO) is the average number of days it takes to sell through your inventory. It is calculated as 365 / inventory turnover ratio. A DSI of 45 days means it takes 45 days on average to sell through your stock. Lower is generally better for working capital efficiency.
How does inventory turnover affect cash flow?
Slow inventory turnover ties up cash in unsold goods. If you have $500,000 in inventory turning over only 3x per year, you hold an average of $167K in stock at all times. Improving turnover to 6x would free approximately $83K in working capital — cash that could be used to fund operations or reduce debt.