Inventory Turnover Formula: Calculate It, Then Decide What to Reorder

What is the inventory turnover formula?

The inventory turnover formula is cost of goods sold divided by average inventory. The result is how many times stock was sold and replaced during the period you measured.

A ratio of 4 means the average units you held were sold through about four times that year. A ratio of 0.8 means most of that stock is still sitting. The number only becomes useful when you attach it to a SKU, a collection, or a supplier lead time and decide whether to reorder, cut the buy, or clear the product.

Shopify merchants usually need the formula at SKU level, not only at company level. A store-wide ratio can look healthy while one bestseller is about to stock out and a slow colorway is tying up cash. Stock intelligence is built for that product-level view: watching sell-through and flagging reorder risk before the average hides it.

How do you calculate average inventory and turnover?

Average inventory is the typical value of stock on hand during the period. The standard shortcut is beginning inventory plus ending inventory, divided by two. Use more snapshots if stock swings hard between seasons.

Keep each method internally consistent. A cost-based turnover compares cost of goods sold with average inventory valued at cost. A unit-based turnover compares units sold with average units held. Mixing retail sales dollars with cost-valued inventory inflates the ratio and makes a slow product look faster than it is.

A worked SKU example

Take a Shopify SKU, a black hoodie in size M, measured over a calendar year.

• Beginning inventory: 120 units at a $22 unit cost, so $2,640.
• Ending inventory: 40 units at the same $22 cost, so $880.
• Units sold: 280. Cost of goods sold: 280 × $22 = $6,160.
• Average inventory: ($2,640 + $880) / 2 = $1,760, or 80 units.
• Inventory turnover: $6,160 / $1,760 = 3.5.

That SKU turned 3.5 times in the year. Dividing 365 by turnover gives about 104 days. That figure is days of inventory based on average stock (the 80 units you typically held), not how long today's on-hand units will last. The 120-unit start pulls the average up. It does not describe the 40 units left on the shelf.

Current cover uses ending available stock and demand. Daily demand is 280 units divided by 365, about 0.77 units a day. Forty units on hand cover about 52 days (40 / 0.77). If supplier lead time is 45 days and you want 30 days of cover after the next delivery lands, the reorder threshold is about 75 days of demand, or about 58 units (75 × 0.77). Ending stock of 40 is already under that threshold, so the next purchase order should go out now, sized to rebuild cover, not be cut or delayed because the 104-day average looked heavy. A known promo that pulls demand forward makes the gap larger, not smaller.

Pull the inputs from places you already trust. Unit cost and quantity on hand live on the product variant. Cost of goods sold for a period comes from orders, refunds, and the cost you recorded on each line, not from a guess at retail price. If cost is missing on a variant, fix that before you trust the ratio. A blank cost field turns the formula into fiction.

When should you use cost of goods sold rather than sales revenue?

Use cost of goods sold whenever you can. The cost-based formula is cost of goods sold divided by average inventory at cost, which keeps the ratio in cost terms and comparable across periods. Sales revenue is a fallback when cost data is incomplete, and it should be labeled as such.

Revenue-based turnover (net sales divided by average inventory at cost) runs higher than the cost-based ratio because the numerator includes gross margin. At a 60% gross margin, sales are 2.5 times cost of goods sold, so the sales-based ratio is 2.5 times the COGS-based ratio when both use the same average inventory at cost. The units did not leave the shelf any faster.

Pick COGS when:

• You are comparing SKUs with different markups.
• You are deciding a reorder quantity, because units and cost are what you buy.
• You want the number to match how lenders and accountants read the ratio.

Pick net sales only when unit cost is missing on a large share of variants, and say so in the report. Do not mix the two formulas in one ranking. A sales-based 6 and a COGS-based 3 are not the same kind of “fast.”

What does high or low turnover tell you to do next?

There is no universal “good” turnover. Apparel often turns slower than consumables. A limited drop can turn once and still be a success. Read the ratio against your own lead time, margin, and the same SKU last year.

A high ratio means stock is leaving quickly relative to what you hold. That can be efficient, or it can mean you are under-buying and paying for it in stockouts. Check lost sales and back-in-stock demand before you celebrate. There is no universal stockout count that forces a higher reorder point. Set that cutoff from your lead time, how often you review purchase orders, and what a missed sale costs. Stocking out more than once a quarter is only an example policy for a store that reviews buys monthly and loses real orders each time the SKU hits zero. If the SKU still converts when it is in stock and it crosses the cutoff you set, raise the reorder point or shorten the review cycle. Do not raise the order just because the ratio looks impressive.

A low ratio means cash is stuck in units that are not selling at the current pace. The next move is usually one of three:

1. Stop or cut the next purchase order until days of cover match lead time plus a small buffer.
2. Reposition the SKU if traffic is the problem: buried in a collection, missing from ads, or priced against a better variant.
3. Clear it if weeks of cover are long, margin after a discount still beats storage and the opportunity cost of that cash, and demand has not responded to better placement.

Turnover does not tell you which of those three is right by itself. Pair it with conversion rate and gross margin before you discount. A slow SKU with strong conversion and almost no sessions is an exposure problem. A slow SKU with plenty of sessions and a weak add-to-cart rate is a product or price problem. Discounting the first one trains customers to wait. Leaving the second one in a hero collection taxes the products that do convert.

Reorder when days of cover are inside lead time plus safety stock and the SKU still converts. Clear when cover is long, demand has not responded to better placement, and a discount still beats holding the cash.

How do you check turnover alongside margin and stockout risk?

Run this check on the SKUs that tie up the most cash, not on every variant every week. A practical way to start is to rank products by inventory dollars and review the top of that list first.

1. Calculate COGS-based turnover, then split the two day counts: 365 divided by turnover is average days inventory was held; units on hand divided by average daily units sold is current days of cover.
2. Note gross margin after expected discounts, not the sticker margin.
3. Compare current days of cover (on-hand units divided by daily demand) to supplier lead time plus your safety buffer. Cover below that window is a reorder. Cover far above it is a hold or a clearance candidate. Do not use 365 divided by turnover for that comparison.
4. Check stockout history. A high-turnover SKU that hits zero is a replenishment failure, not a win.
5. Check whether the product is actually visible. Low turnover plus low sessions is a merchandising job before it is a markdown job.

Two related ratios keep this honest. The inventory-to-sales ratio shows how heavy stock is versus recent sales, which is useful when you want a monthly pulse instead of an annual turn. Days sales in inventory (365 divided by turnover) is the average holding period, the same family of math as turnover, not a substitute for current days of cover. Use current cover, on-hand units divided by daily demand, when you are talking to a supplier about lead time. Use the turnover multiple, or days sales in inventory, when you are comparing a year to last year.

Review the list on the same cadence as purchase orders, not once a year at tax time. A quarterly company ratio will not save a bestseller that sells out in week six. SKU-level turnover, current days of cover, and a written reorder-or-clear rule will.