Inventory Turns

What is an inventory turn?

Inventory turn—also called inventory turnover, turn rate, turnover ratio, and retail turns— measures how many times retail inventory is sold and replaced during a period of time, such as a year. Inventory turns lead to better cashflow and profitability in retail.

A way of understanding retail inventory turns is to think about the business of a restaurant. The more tables a server turns in a shift, the more meals the restaurant serves and the more tips the server earns.

Similarly, the more inventory turns in retail, the more merchandise sold by the store and the more commissions earned by sales representatives. Selling an item generates cash. Using the same retail floor space to sell several items throughout the year improves profitability. Higher turn is a sign of a successful business.

Why is inventory turn an important metric?

Knowing your store’s turns ratio—and making a plan to improve it—is the best use of a retail owner’s or manager’s time and energy. The reason most retail stores go out of business is due to a lack of cashflow. And the root cause of poor cashflow is almost always low inventory turn and poor inventory management.

Frequent inventory turns leads to better cashflow and profitability. Fresh inventory delights customers and increases satisfaction. Four advantages of more turns are:

• Holding costs are lower when inventory sells fast.
• Capital is available for other uses, including paying the store owner.
• Steady cashflow makes it easier to pay bills and buy new merchandise to sell.
• Fresh, well-stocked shelves attract new and repeat customers.

How to measure inventory turns

Inventory turns measure how many times retail inventory is sold and replaced over a period of time. Inventory turns can be calculated in a few ways. You can calculate turns:

• At wholesale cost (as shown in this guide)
• At retail price
• Based on item quantities

How to calculate inventory turns

Follow three steps to calculate your inventory turn.

Step 1: Measure inventory value each month

On the close of every month, see how much inventory you have on hand, based on wholesale cost, and record the total in your accounting software. Run a report in your point of sale system, such as Shopify or Lightspeed, to get this number.

Tip: New to this? Inventory on hand is an asset on a store’s balance sheet. The value of your wholesale inventory at the end of last year can provide a starting point. Start tracking from there.

Step 2: Calculate average inventory value

Calculate average inventory value once you have two periods of inventory value data. Use wholesale cost to value your inventory. Add the beginning and ending inventory values together, and then divide by two.

Example: If a store has a beginning inventory value of $100,000 on June 30, 2023 and an ending inventory value of $150,000 a year later, the average inventory value is $125,000.

Step 3: Calculate inventory turns

You need two numbers to calculate inventory turns: average inventory value and cost of goods sold (COGS) for the same time period. Inventory turn is calculated as follows: COGS divided by average inventory value.

Tip: To find COGS in your point of sale system, select a time period and include wholesale cost in the report. The total COGS appears at the bottom of the wholesale cost column.

Example: A store sold $600,000 of merchandise during a one-year period ending June 30, 2024. The wholesale cost, or COGS, of the merchandise was $300,000. For the same period, the store had an average inventory value of $125,000.

Calculate inventory turn like this:

Answer: The store’s inventory turn is 2.4, which means the inventory is sold and replaced 2.4 times in a year.

What is a good inventory turnover?

You may wonder what is a good inventory turn rate? Is the example, 2.4 times per year, a good inventory turnover? A low number of inventory turns means items aren’t selling. A higher number of turns is better, unless it means you can’t keep an item in stock and lose sales opportunities.

The best number of inventory turns in retail depends on what you sell. Items, like groceries and fast fashion, that are perishable or quickly become outdated require a high inventory turn. A retailer with low-profit items needs more turns to earn the same profit as a luxury goods store with higher profit margins.

Examples: The following are industry benchmarks of inventory turnover per year for various types of independent retailers:

• 4-6: Fast fashion
• 3: Outdoor boutique (apparel and footwear)
• 2-3: Contemporary (mix of seasonal apparel and staples)
• 2: Footwear
• 2: Outdoor sporting goods (gear)
• 1-2: Luxury

How to use inventory turns to be more successful

Congratulations! If you’ve done the work to calculate your store’s inventory turns, you are one of the few independent retailers who understand this important retail business concept. Now what? Put it to work to improve your business, like this:

Max Retail co-founder Melodie van der Baan owned a contemporary women’s retail store in Florida where she tracked inventory turns to create a much more successful retail business. At the start, the store had an inventory turnover rate of 1.6 turns per year. With the assistance of a retail inventory management consultant, inventory planning, and markdowns to sell unsold inventory, she increased inventory turns to 2.6 turns per year. She spent much less time working the floor, because the revamped store had the right amount of the right merchandise at the right time. Inventory on hand was half of what it was previously. Melodie and her partner sold the successful retail business, which still operates today.

Cash out of slow-moving inventory

To increase inventory turn, mark down or sell online your slow-moving, aging, and excess inventory. Max Retail helps independent retailers of top brands sell unsold inventory online, quickly and conveniently.

Retailers typically recoup most of wholesale price on unwanted inventory. Max Retail covers the entire listing enhancement process, pays for shipping and taxes, and provides customer service to consumers—all for $35/month and a 15% transaction fee. You receive payouts when you ship the merchandise to fulfill a sale.

To sell on Max Retail, you can run an on-hand report from your point-of-sale (POS) software and have the Max Retail team list it on your behalf. Or you can list it yourself with a few clicks via a software integration with Shopify or Lightspeed. (Square and RICS integrations are coming soon.)

The platform’s technology automatically enhances your product data—finding images, descriptions, attributes—to increase the likelihood that your piece will sell at the best price. We adapt to the nuances of each e-commerce marketplace—they are all different. Then we offer your inventory in all relevant marketplaces at once.

Max Retail is like an inexpensive employee who boosts your inventory turns and cash flow—or you can think of us like a Get Out of Jail Free card for unsold inventory, like this:

6 steps to improve inventory turns

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