How to calculate stock turnover

1. Work out average stock: add the stock value at the start of the period to the value at the end, and halve the total.
2. Divide cost of goods sold for the period by that average. The answer is the stock turnover, in times per period.
3. To turn it into days, divide the number of days in the period by the stock turnover, which must also be above zero.

The calculation needs average stock above zero. A business that buys only to order and holds nothing on hand has no turnover to measure.

Cost of goods sold comes from the profit and loss statement for the period. Use the period's own figure: for a quarter, the quarter's cost of goods sold, not the total for the year so far.

Stock values come from the balance sheet at the start and end of the period, or from your inventory records. business.gov.au's glossary describes stock as the goods and materials a business is holding at the time. Both sides of the sum must be at cost. Dividing sales at selling prices by stock at cost makes stock look as though it moves faster than it does.

Read the turnover as how many times, on average, the store sold through its stock and replaced it during the year. The days figure says the same thing as a length of time: how long, on average, an item waited on the shelf before it was sold.

To get stock turnover days for a quarter, divide the days in that quarter by the quarter's own turnover. Here is a pet supplies store's quarter from April to June:

The store sold through its stock about three times in the quarter, so an item waited about a month on the shelf, on average. The easy slip is mixing periods. Dividing 365 by the quarter's turnover gives 122 days, four times too long, because the days and the cost of goods sold have to cover the same stretch of time. Using a full year's cost of goods sold with the quarter's 91 days makes the same mistake in reverse.

To compare a quarter with a full year, multiply the quarter's turnover by four, or compare days, which read the same for any period. Multiplying by four assumes the rest of the year looks like this quarter, which a seasonal business can't assume. The fairer comparison for one quarter is the same quarter last year, worked out the same way.

In a spreadsheet, give each month or quarter a row: cost of goods sold from the profit and loss statement for exactly that period, stock at the start and end from the balance sheet or stock records, and formulas for average stock, turnover and days. Set the turnover and days cells to stay blank when average stock or turnover is zero, so a gap in the data shows as a gap rather than an error. If the figures come from accounting software, run both reports for matching dates; a mismatch there throws out every later cell.

An average of the opening and closing figures can mislead when stock swells in the middle of the year, such as before a busy season. Averaging the stock value at the end of each month or quarter gives a truer picture.

The pre-Christmas build-up pulls the average higher, so the store turned its stock over a little more slowly than the simple version suggested.

business.gov.au suggests grouping inventory into categories, such as product type, supplier or location, and comparing stocktake results over time with sales records to spot fast sellers and lines with no sales. Turnover by category puts a number on that.

Outdoor furniture ties up a large amount of stock for the sales it produces. business.gov.au's suggestions for acting on stocktake results include putting slow-moving items on sale and retiring lines that aren't selling.

Turnover and days for each product line show which items carry a category and which sit still. Here is the pet supplies store's quarter, line by line:

The overall figure of 30 days hides a spread from 15 to 91. Aquarium equipment holds almost a third of the store's stock but accounts for only about a tenth of its cost of goods sold.

Read each line against its own past figures and its job in the range, rather than against the others. A line whose days figure climbs quarter after quarter is slowing down, even before its sales visibly fall. A food line that turns quickly may simply be restocked often; if its days figure gets close to the supplier's delivery time, it is at risk of running out before the next order lands. A slow equipment line may still be worth holding if customers expect to find it in the store, but it is the first place to look for stock to reduce.

A higher turnover means less average stock is held for each dollar of cost of goods sold; a lower one means more. It does not show whether the total cash tied up in stock has fallen. There is no single right figure: a florist and a hardware store hold very different stock, so compare the business with itself over time rather than with a target from somewhere else.

Very fast turnover is not always good news either. It can mean the business keeps running out and losing sales. business.gov.au suggests giving each item a reorder point: a minimum stock level that triggers a new order, set from how fast the item sells and how long deliveries take.

Its cash flow guidance ties unsold stock directly to having less money, and suggests keeping stock levels in check and clearing out lines that are out of date or not selling.

Turnover changes when either side of the division moves: cost of goods sold, which follows sales, or the average stock held. Some common reasons:

• Sales rise or fall while stock levels stay where they were.
• Buying in bigger lots, for example to get a better price, lifts average stock and lowers turnover until the extra stock sells.
• A new line goes on the shelf before it has any sales, so turnover dips while it settles in.
• Longer delivery times from a supplier mean holding more stock to cover the wait. business.gov.au's reorder point method builds in how long new stock takes to arrive.
• A sale to clear slow lines raises cost of goods sold and lowers stock at the same time.
• Supplier price rises lift both sides at cost over time, so check quantities as well as values before reading much into a change.

Two ideas in business.gov.au's cash flow guidance act on the stock side directly: an inventory management system that automates ordering, which can also shorten the time between placing and receiving orders, and buying some stock only when a customer orders it. When the figure moves, check which side moved before deciding whether it is good news.

• A closing stock figure that was estimated rather than counted.
• A large delivery just before the period end, which lifts the average for reasons that have nothing to do with how fast stock sells.
• Damaged or out-of-date stock still counted at full cost. How it is valued is a question for your accountant.
• Periods so short that a single delivery swings the result.

It can't be negative if the figures are right, but it can be less than 1, and a decimal is normal. Cost of goods sold and stock at cost are both zero or more, so the result is too.

A negative figure means an input is wrong. Stock records can show negative quantities when sales are recorded before the purchase that supplied them, and a large correcting entry can push a period's cost of goods sold below zero. Fix the inputs before reading the result.

A figure below 1 means the business sold less, at cost, than the stock it held on average over the period. For a single month that is plain arithmetic: stock that turns 6 times a year turns about 0.5 times a month. Over a full year, a figure below 1 means more than a year's stock at the current rate of sales, and the days figure is above 365. Round turnover to one decimal place and days to whole days, as the examples on this page do.

No. On its own, turnover means sales income: business.gov.au's glossary treats it as another name for revenue, the amount earned before expenses and other deductions. Stock turnover is a ratio that counts how often stock is sold and replaced, and it works from cost of goods sold, not sales.

So does turnover include closing stock? Turnover in the sales sense doesn't: it is income only. Closing stock reaches profit through cost of goods sold. In the stock turnover calculation, closing stock is one of the figures averaged, along with opening stock.

The ratio goes by several names: stock turns, inventory turnover and the stock turnover ratio. The days version is also called stock turnover days, the stock turnover period or inventory days. They all describe the calculation on this page. Debtors turnover and asset turnover are different ratios again, built on sales rather than stock; our guide to calculating debtor days covers the first.