Your money is tied up in inventory.
It’s sitting on shelves. It’s not moving. It’s not generating revenue.
You’re bleeding cash. You don’t realize it. You don’t see the problem.
Inefficient inventory kills cash flow.
Slow-moving inventory ties up capital. It increases costs. It reduces profitability.
This guide shows you how to fix it.
Identify inefficiency. Calculate turnover. Optimize inventory.
Key Takeaways
- Inventory turnover measures how fast inventory sells—low turnover means money tied up in slow-moving stock
- Use Inventory Turnover Calculator to calculate turnover ratio and identify which products are moving slowly
- Healthy inventory turnover varies by industry—retail typically 4-6x, manufacturing 6-8x, wholesale 8-12x annually
- Optimize inventory by eliminating slow-moving products, reducing safety stock, improving forecasting, and implementing just-in-time practices
- Monitor inventory turnover monthly and track trends to catch inefficiency early before it becomes a cash flow crisis
Table of Contents
Why Inventory Efficiency Matters
Inventory efficiency determines cash flow.
Without efficient inventory:
- Money tied up in slow-moving stock
- High carrying costs
- Cash flow problems
- Reduced profitability
- Business failure risk
With efficient inventory:
- Money freed up for growth
- Lower carrying costs
- Healthy cash flow
- Improved profitability
- Business sustainability
The reality: Inefficient inventory ties up 20-40% of working capital.
Most businesses don’t track inventory efficiency. They stock. They hope it sells.
The truth: Inventory efficiency is measurable. Calculate it. Monitor it. Optimize it.
Understanding Inventory Turnover
Inventory turnover measures how fast inventory sells.
The formula:
- Inventory Turnover = Cost of Goods Sold / Average Inventory
What it shows:
- High turnover = Fast-moving inventory (good)
- Low turnover = Slow-moving inventory (bad)
Example:
- COGS: $600,000/year
- Average Inventory: $100,000
- Inventory Turnover = $600,000 / $100,000 = 6.0x
Your inventory turns 6 times per year. Every 2 months.
Turnover by Industry
Retail:
- Typical: 4-6x per year
- Good: 6-8x per year
- Poor: Below 4x per year
Manufacturing:
- Typical: 6-8x per year
- Good: 8-12x per year
- Poor: Below 6x per year
Wholesale:
- Typical: 8-12x per year
- Good: 12-16x per year
- Poor: Below 8x per year
Compare your turnover to industry benchmarks.
Calculating Inventory Turnover
Calculate inventory turnover monthly.
Step 1: Calculate Cost of Goods Sold
Calculate COGS for the period.
COGS includes:
- Direct materials
- Direct labor
- Manufacturing overhead
- Cost of products sold
Total: Your COGS for the period.
Step 2: Calculate Average Inventory
Calculate average inventory for the period.
Average Inventory:
- (Beginning Inventory + Ending Inventory) / 2
Or use monthly averages for more accuracy.
Step 3: Calculate Turnover
Divide COGS by average inventory.
The formula:
- Inventory Turnover = COGS / Average Inventory
Use the Inventory Turnover Calculator to calculate automatically.
Step 4: Calculate Days on Hand
Calculate how many days inventory sits.
The formula:
- Days on Hand = 365 / Inventory Turnover
Example:
- Turnover: 6.0x
- Days on Hand = 365 / 6.0 = 61 days
Your inventory sits for 61 days on average.
Identifying Inefficient Inventory
Identify inefficient inventory systematically.
Sign 1: Low Turnover Ratio
Turnover below industry average.
Red flags:
- Turnover below 4x (retail)
- Turnover below 6x (manufacturing)
- Turnover below 8x (wholesale)
If turnover is low, you have inefficient inventory.
Sign 2: High Days on Hand
Inventory sits too long.
Red flags:
- Days on Hand above 90
- Days on Hand increasing
- Inventory aging
If days on hand are high, you have inefficient inventory.
Sign 3: Slow-Moving Products
Some products don’t move.
Red flags:
- Products with zero sales
- Products with declining sales
- Products with low velocity
If products don’t move, you have inefficient inventory.
Sign 4: High Carrying Costs
Costs of holding inventory are high.
Red flags:
- Storage costs increasing
- Obsolescence costs
- Insurance costs
- Opportunity costs
If carrying costs are high, you have inefficient inventory.
Optimizing Inventory
Optimize inventory systematically.
Strategy 1: Eliminate Slow-Moving Products
Remove products that don’t sell.
How to eliminate:
- Identify slow-moving products
- Liquidate or discount
- Stop reordering
- Focus on fast-moving products
Impact: Free up cash. Reduce costs.
Strategy 2: Reduce Safety Stock
Reduce excess safety stock.
How to reduce:
- Analyze demand patterns
- Calculate optimal safety stock
- Reduce excess inventory
- Improve forecasting
Impact: Lower inventory levels. Better cash flow.
Strategy 3: Improve Forecasting
Improve demand forecasting.
How to improve:
- Analyze historical sales
- Identify trends
- Adjust for seasonality
- Use forecasting tools
Impact: Better inventory planning. Reduced waste.
Strategy 4: Implement Just-in-Time
Implement just-in-time inventory.
How to implement:
- Work with suppliers
- Reduce lead times
- Order more frequently
- Maintain minimal stock
Impact: Lower inventory. Better cash flow.
Strategy 5: Optimize Reorder Points
Optimize when to reorder.
How to optimize:
- Calculate reorder points
- Set minimum stock levels
- Automate reordering
- Monitor stock levels
Impact: Prevent stockouts. Reduce excess.
Inventory Management Framework
Use this framework to manage inventory.
Step 1: Calculate Turnover
Calculate inventory turnover monthly.
Calculate:
- COGS for period
- Average inventory
- Turnover ratio
- Days on hand
Use the Inventory Turnover Calculator.
Step 2: Compare to Benchmarks
Compare turnover to industry benchmarks.
Compare:
- Your turnover vs. industry average
- Your days on hand vs. industry
- Trends over time
If below benchmarks, take action.
Step 3: Identify Problem Products
Identify slow-moving products.
Identify:
- Products with low turnover
- Products with high days on hand
- Products with declining sales
Step 4: Develop Strategy
Develop inventory optimization strategy.
Strategy options:
- Eliminate slow-moving products
- Reduce safety stock
- Improve forecasting
- Implement just-in-time
Step 5: Implement and Monitor
Implement strategy and monitor results.
Monitor:
- Turnover improvements
- Days on hand reduction
- Cash flow impact
- Cost reductions
Your Next Steps
Stop tying up money in inventory. Start optimizing.
This week:
- Calculate your inventory turnover using the Inventory Turnover Calculator
- Compare to industry benchmarks
- Identify slow-moving products
- Calculate days on hand
This month:
- Eliminate slow-moving products
- Reduce safety stock
- Improve forecasting
- Monitor turnover improvements
Ongoing:
- Calculate turnover monthly
- Track trends over time
- Optimize continuously
- Monitor cash flow impact
Remember: Inefficient inventory ties up cash. Calculate turnover. Optimize inventory. Free up cash.
Key Takeaways Recap
- Inventory turnover measures how fast inventory sells—low turnover means money tied up in slow-moving stock
- Use Inventory Turnover Calculator to calculate turnover ratio and identify which products are moving slowly
- Healthy inventory turnover varies by industry—retail typically 4-6x, manufacturing 6-8x, wholesale 8-12x annually
- Optimize inventory by eliminating slow-moving products, reducing safety stock, improving forecasting, and implementing just-in-time practices
- Monitor inventory turnover monthly and track trends to catch inefficiency early before it becomes a cash flow crisis
Related Tools and Resources
Inventory Management Calculators
- Inventory Turnover Calculator - Calculate inventory turnover ratio
- Working Capital Calculator - Manage working capital
- Cash Flow Forecast Calculator - Project cash flow
Financial Analysis Tools
- Profit Margin Calculator - Analyze profitability
- Cost Efficiency Score Calculator - Measure efficiency
Need help optimizing your inventory? Contact Business Initiative for inventory management analysis and strategic guidance.
