You have inventory.
You want to know if it’s helping or hurting.
You need to understand turnover.
You need the basics.
Inventory turnover. Days on hand. Cash flow impact. Your clarity.
This guide shows you how.
Turnover basics. Days calculation. Cash flow understanding. Your knowledge.
Read this. Calculate turnover. See the impact.
Key Takeaways
- Calculate inventory turnover—use Inventory Turnover Calculator to see how quickly you sell inventory
- Calculate days on hand—see how many days inventory sits before being sold
- High turnover is good—faster turnover means better cash flow and less tied-up capital
- Low turnover is warning—slow turnover means cash is tied up and inventory may be obsolete
- Compare to industry—turnover ratios vary by industry, compare to your sector's standards
Table of Contents
Why Turnover Matters
Turnover affects cash flow.
What happens with low turnover:
- Cash is tied up
- Inventory sits unsold
- Storage costs increase
- Obsolescence risk grows
What happens with high turnover:
- Cash flows freely
- Inventory moves quickly
- Storage costs are low
- Obsolescence risk is minimal
The reality: Turnover determines cash flow health.
What Is Turnover
Understand inventory turnover:
Turnover Definition
What turnover measures:
- How many times inventory is sold per year
- Speed of inventory movement
- Efficiency of inventory management
- Cash flow velocity
Why it matters: Turnover shows efficiency.
Turnover Formula
How to calculate:
- Cost of goods sold divided by average inventory
- Shows how many times inventory turns over
- Higher number means faster turnover
Why it matters: Formula enables calculation.
Turnover Interpretation
What numbers mean:
- High turnover: Fast movement, good efficiency
- Low turnover: Slow movement, poor efficiency
- Industry varies: Different sectors have different norms
Why it matters: Interpretation guides action.
Pro tip: Understand turnover. Definition, formula, interpretation. See our inventory optimization guide for strategies.
Days on Hand
Understand days on hand:
Days on Hand Definition
What days on hand measures:
- How many days inventory sits before sale
- Average holding period
- Cash tie-up duration
- Inventory age
Why it matters: Days show holding period.
Days on Hand Calculation
How to calculate:
- 365 divided by inventory turnover
- Shows average days inventory is held
- Lower number means faster sale
Why it matters: Calculation reveals holding period.
Days on Hand Interpretation
What numbers mean:
- Low days: Fast sale, good cash flow
- High days: Slow sale, poor cash flow
- Industry varies: Different sectors have different norms
Why it matters: Interpretation guides action.
Pro tip: Understand days on hand. Definition, calculation, interpretation. Use our Inventory Turnover Calculator to see both metrics.
Calculating Turnover
Calculate your turnover:
Use Inventory Turnover Calculator
Calculate it:
- Use our Inventory Turnover Calculator
- Enter cost of goods sold and average inventory
- See turnover ratio and days on hand
Why it matters: Calculator provides accuracy.
Gather Required Data
What data you need:
- Cost of goods sold for period
- Average inventory value
- Time period (usually annual)
- Accurate inventory records
Why it matters: Accurate data ensures accurate results.
Calculate Regularly
When to calculate:
- Monthly for tracking
- Quarterly for trends
- Annually for comparison
- When making decisions
Why it matters: Regular calculation enables monitoring.
Pro tip: Calculate turnover. Use calculator, gather data, calculate regularly. See our Inventory Turnover Calculator for easy calculation.
Interpreting Results
Interpret your results:
High Turnover (Good)
What high turnover indicates:
- Fast inventory movement
- Good cash flow
- Efficient operations
- Low holding costs
Why it matters: High turnover is positive.
Low Turnover (Warning)
What low turnover indicates:
- Slow inventory movement
- Poor cash flow
- Inefficient operations
- High holding costs
Why it matters: Low turnover is warning sign.
Industry Comparison
What to compare:
- Your turnover vs. industry median
- Your days vs. industry average
- Your efficiency vs. peers
- Your position vs. standards
Why it matters: Comparison provides context.
Pro tip: Interpret results. High turnover good, low turnover warning, compare to industry. See our inventory dashboard guide for monitoring.
Cash Flow Impact
Understand cash flow impact:
How Turnover Affects Cash Flow
What the impact is:
- High turnover: Cash flows faster
- Low turnover: Cash is tied up
- Days on hand: Shows cash tie-up period
- Efficiency: Determines cash availability
Why it matters: Impact affects business health.
Cash Flow Problems from Low Turnover
What problems develop:
- Cash tied up in inventory
- Reduced working capital
- Limited growth capital
- Increased financing needs
Why it matters: Problems constrain business.
Cash Flow Benefits from High Turnover
What benefits you get:
- Faster cash recovery
- More working capital
- Better growth capital
- Reduced financing needs
Why it matters: Benefits enable growth.
Pro tip: Understand impact. How turnover affects cash flow, problems from low turnover, benefits from high turnover. See our inventory optimization guide for improvement strategies.
Your Next Steps
Calculate turnover. Interpret results. Improve cash flow.
This Week:
- Review this guide
- Calculate your inventory turnover
- Calculate your days on hand
- Compare to industry standards
This Month:
- Track turnover monthly
- Identify improvement opportunities
- Implement optimization strategies
- Monitor cash flow impact
Going Forward:
- Calculate turnover regularly
- Track trends over time
- Optimize continuously
- Maintain healthy turnover
Need help? Check out our Inventory Turnover Calculator for calculation, our inventory optimization guide for strategies, and our inventory dashboard guide for monitoring.
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FAQs - Frequently Asked Questions About Inventory Turnover 101: How to Know If Your Stock Is Helping or Hurting Cash Flo
What is inventory turnover and what does the ratio actually measure?
Inventory turnover measures how many times your inventory is sold and replaced per year, showing efficiency.
Learn More...
Inventory turnover is calculated by dividing Cost of Goods Sold by Average Inventory. It measures the speed of inventory movement, the efficiency of inventory management, and the cash flow velocity of your business. A higher number means faster turnover (inventory sells quickly), while a lower number means slower turnover (inventory sits longer before selling). It is one of the most important metrics for understanding whether your stock is helping or hurting cash flow.
How do you calculate days on hand and what do the results mean?
Divide 365 by your inventory turnover ratio to see the average number of days inventory sits before being sold.
Learn More...
Days on Hand = 365 / Inventory Turnover. This metric shows the average holding period for your inventory. Low days on hand means fast sales and good cash flow, while high days on hand means slow sales, poor cash flow, and increased risk of obsolescence. For example, a turnover of 6x means your inventory sits for about 61 days on average. Different industries have different norms, so always compare to your sector standards.
What cash flow problems develop when inventory turnover is low?
Cash gets tied up in unsold inventory, reducing working capital and limiting money available for growth.
Learn More...
Low inventory turnover creates four cash flow problems: cash tied up in inventory that is not generating revenue, reduced working capital because money sits on shelves instead of being available for operations, limited growth capital because funds are locked in slow-moving stock, and increased financing needs because you may need to borrow to cover operating expenses while your cash is trapped in inventory.
What are the benefits of high inventory turnover for a business?
Faster cash recovery, more working capital, better growth capital, and reduced financing needs.
Learn More...
High inventory turnover delivers four key benefits: faster cash recovery because products sell quickly and revenue comes in sooner, more working capital available for day-to-day operations, better growth capital because freed-up cash can be reinvested in the business, and reduced financing needs because you are not borrowing to cover cash that is tied up in inventory. Additionally, high turnover means lower storage costs and minimal risk of inventory becoming obsolete.
How often should I calculate inventory turnover and why?
Calculate monthly for tracking, quarterly for trends, and annually for year-over-year comparison.
Learn More...
The article recommends calculating turnover at three intervals: monthly for real-time tracking of inventory health, quarterly for identifying trends and seasonal patterns, and annually for year-over-year comparison and benchmarking against industry standards. Regular calculation enables early detection of problems, allows you to spot declining efficiency before it becomes a crisis, and helps you make data-driven decisions about inventory management.
How do I know if my inventory turnover is good or bad for my industry?
Compare your turnover ratio and days on hand to your industry median and peer performance.
Learn More...
The article recommends comparing four metrics to industry standards: your turnover ratio versus the industry median (what is typical for your sector), your days on hand versus the industry average, your efficiency versus peer businesses, and your position versus accepted standards. What counts as good or bad varies significantly by industry, so a turnover of 4x might be excellent for one sector but poor for another. Context is essential for accurate interpretation.
Sources & Additional Information
This guide provides general information about inventory turnover. Your specific situation may require different considerations.
For inventory turnover calculation, see our Inventory Turnover Calculator.
For inventory optimization strategies, see our Inventory Optimization Guide.
Consult with professionals for advice specific to your situation.
