Inventory Turnover: What They Are and How They Play Into Business Success

Businesses grow and increase revenue by understanding how their offerings get into the hands of real customers — and by making those transactions happen on repeat. For companies that sell physical inventory or consumer products, inventory turnover is an important metric that indicates the pace at which purchases or transactions take place in real-world buying scenarios.

Inventory turnover is an essential measurement across multiple suppliers and industry types, especially wholesale suppliers. For the most part, all consumer-focused businesses need to know how much product they’re selling, their profit after the cost of goods is factored in, and how to increase all types of sales transactions over time.

In this post, we’ll focus on how to define, calculate, and understand inventory turnover so you can measure your business volume with ease and confidence.

What Is Inventory Turnover?

Inventory turnover (or inventory turns) measures the number of times all available stock is sold over an established period. This calculation informs many important operational decisions, including how much product to restock at a given time and how to rise to meet customer demands.

Understanding inventory turns also gives more insight into how quickly businesses will be able to access funds to make the next round of purchases. When profit margins are higher, businesses and wholesalers can reinvest those earnings back into new products, meaning there’s a more predictable path to increasing output and expanding sales goals.

How To Calculate Inventory Turns

The simplest formula for calculating inventory turns is expressed as a ratio. It involves dividing the cost of goods sold (COGS) by the average value of the inventory available. To accurately calculate a true inventory turn ratio, a business must decide how often it wants to calculate the turnover rate, which could mean calculating the number quarterly, bi-annually, or yearly, often based on the business’s sales activities.

Here’s what the calculation looks like in practice:

Cost of goods sold (COGS) ÷ average inventory value (beginning inventory + ending inventory)/2

Examples of Inventory Turns in Business

To visualize how inventory turnover works in an actual business example, let’s look at the inventory turnover equation through the lens of an active cell phone resale shop.

• Motor Cellular purchases $250,000 worth of used mobile phones and devices every two weeks. The owner sells the available inventory for $300,000, which results in a $50,000 profit during that time.
• Because the buying and selling cycle takes two weeks, this store runs through two inventory cycles per month on average, resulting in a monthly profit of $100,000.
• Next, to calculate Motor Cellular’s average monthly inventory turn, take the starting inventory of $250K plus the ending inventory of $250K and divide by two, which equals $250K.
• Now we can determine the inventory turn with a COGS of $500,000 a month. Divide COGS by the average inventory. $500,000/$250,000 = 2 inventory turns a month.

Practical Ways To Increase Inventory Turns

More inventory turns, on average, mean that more product is moving off the shelves. For most businesses, this is the ideal scenario for scalability and profitability. A higher number of inventory turns per month or per quarter is also useful when the value of the product sold is known to depreciate or drop quickly. For example, used cell phones hold less value over time or the longer they sit on shelves before purchase, so it’s best to move them quickly while they can still be sold at peak consumer value.

Calculating inventory turnover is part of proper business practices and effective operational management. Businesses can increase inventory turns by applying the following practical tips:

• Use smart, consumer-friendly pricing that increases demand for new products.
• Study accurate pricing forecasts to better understand COGS versus profitability or sales success.
• Boost sales of old or outdated stock (sometimes at steeper discounts) to make room for more high-ticket items.
• Increase the speed of the sales cycle, from initial research to purchase to shipping.
• Understand your specific customer base and focus on stocking products that are in demand or more likely to sell regardless of seasonality.

While any of these strategies may work based on specific business examples, the smartest strategy is to focus on understanding a given customer base and adapting, supplying in-demand products that customers want — at fair prices that are more likely to sell quickly and efficiently.

Leveraging Inventory Turns as a Wholesale Cellphone Supplier

As a wholesale supplier, the clock is ticking when it comes to restocking, moving products, and adjusting to a quickly changing industry. Wholesalers, in particular, must account for many unique variables in the business, including the original cost of goods, item value and profitability, and projected future growth.