What is a Good Inventory Turnover Ratio: Formula, Calculate & Improvement | OrderEase

Inventory turnover measures the frequency with which your products are sold and replaced during a certain period (most often a year). In plain terms, it measures how quickly goods move through your business.

A healthy inventory turnover ratio means you’re selling products and generating cash rather than letting items sit unsold on the shelf.

For midsize wholesalers, manufacturers, and distributors, a strong turnover ratio translates into less tied-up capital, fresher stock, and smoother operations. It also highlights how effectively your business matches supply with demand.

Inventory turnover matters because it touches on cash flow and efficiency.

If inventory lingers unsold, you tie up money in storage costs, insurance, and the risk of obsolescence. Conversely, if inventory sells very quickly (a high turnover ratio), you may turn inventory into cash fast, but you must ensure you don’t run out of stock too often.

In short, the inventory turnover ratio is a vital sign of business health. It helps you spot overstocking or understocking issues, informs purchasing and pricing decisions, and ultimately keeps your supply chain lean and responsive.

Understanding Inventory Turnover

Inventory turnover is usually calculated as Cost of Goods Sold (COGS) divided by Average Inventory. In other words, it’s the number of times your business “turns over” its inventory in a given period.

For example, a turnover ratio of 6 means that on average, you sold all your inventory six times during the year. A higher ratio generally means stronger sales or lower stock levels, while a lower ratio indicates slower sales or too much inventory on hand.

A quick way to think about it is in days: divide the number of days in the period (often 365) by the turnover ratio to get “days to sell inventory.” If your inventory turns 5 times a year, you sell it all in about 73 days on average (365/5). That insight can help you plan promotions or reorder schedules.

How to Calculate Inventory Turnover

Calculating your inventory turnover ratio involves just a few steps. The formula is straightforward and can usually be done with data from your accounting or inventory system:

1. Choose the time period you want to measure (typically one year or one quarter).
2. Find your Cost of Goods Sold (COGS) for that period. This number appears on your income statement and represents what it cost you to produce or purchase the goods you sold.
3. Calculate your Average Inventory for the same period. To do this, add the value of inventory at the beginning of the period to the value at the end of the period, then divide by two. This smooths out seasonal spikes or lows.
4. Divide COGS by Average Inventory.
   For example, if your annual COGS is $1,000,000 and your average inventory is $250,000, your turnover ratio is 4. This means you cleared and replaced your inventory four times that year.

If you also want to know how many days' inventory lasts, divide the number of days in the period by the turnover ratio.

In this example: 365 / 4 ≈ 91 days to sell your inventory once.

What is a Good Inventory Turnover Ratio?

Rather than a universal number, a “good” inventory turnover ratio reflects healthy sales relative to your stock levels. In general, a higher turnover ratio is better because it means you’re selling goods quickly and not holding excess inventory.

However, too high can signal a risk of stockouts. A good ratio finds balance: enough stock to meet demand without overspending on inventory.

To evaluate if your ratio is healthy, ask how it fits with your business goals and cash flow needs. For example:

• Strong Demand: If your products have steady demand, you’ll see a higher turnover.
• Adequate Supply: If your turnover is extremely high, double-check that you’re not running out too often.
• Cash Flow & Working Capital: A good ratio helps keep working capital low.

It’s important to evaluate turnover in the context of your business. Seasonal factors, product lifecycle, and growth plans all influence what’s “good.” Here are some industry standards:

• Wholesale Distribution: 5–10
• Agriculture & Horticulture: 3–6
• Food & Beverage Distribution: 8–14
• Industrial Supplies & Equipment: 3–5
• Apparel & Lifestyle Goods: 4–8

Clean order data is the foundation of accurate inventory turnover. OrderEase centralizes order information from every channel.

Common Reasons for High or Low Turnover

Inventory turnover can be affected by several operational and market-related factors. A low turnover ratio often signals inefficiencies, while a high ratio can reflect strong sales or lean inventory practices. Here's a closer look:

Low Inventory Turnover can be caused by:

• Excess stock: Holding too much inventory leads to slower movement and ties up capital.
• Slow sales: Poor demand or seasonality can drag down turnover.
• Obsolete or outdated products: Items no longer in demand remain on shelves and decrease overall efficiency.
• Price misalignment: Products priced too high may deter buyers, leading to sluggish sales.
• Supply chain delays: Delays can force businesses to stock up unnecessarily, resulting in excess.

High Inventory Turnover may result from:

• Strong demand or trending products: Popular items naturally sell quickly and replenish often.
• Lean inventory policies: Minimizing on-hand stock to reduce holding costs can increase turnover.
• Effective marketing: Promotions or strong brand awareness can boost product movement.
• Low safety stock levels: Limited buffer stock may lead to quicker sell-through, though it carries the risk of stockouts.
  

How Streamlined Order Processing Supports Inventory Decisions

Smooth order processing is an unsung hero of inventory turnover. When your order-to-cash workflow is streamlined, your inventory team gets timely, accurate sales data. That data is gold for managing stock levels. Here’s how better ordering processes translate into smarter inventory decisions:

• Real-Time Sales Visibility
• Fewer Data Errors
• Faster Order-to-Fulfillment
• Centralized Order Information
• Better Forecasting & Planning

In essence, streamlined order processing drives faster, clearer information to the inventory team. When everyone works from the same up-to-date data, stock levels stay aligned with demand.

This is where tools like OrderEase come in.

OrderEase simplifies how wholesale businesses process orders across all channels, from online portals and field sales to email and EDI, resulting in faster order approvals, fewer errors, and cleaner data for inventory and finance teams to act on.

Practical Ways to Improve Inventory Turnover

Improving inventory turnover doesn't necessarily require new software, often, it's about using existing tools and data more effectively. Here are some practical strategies:

• Refine purchasing decisions using sales data: Analyze past sales trends to make smarter buying choices and avoid overstocking slow-moving items.
• Run promotions to move stagnant stock: Launch targeted sales campaigns to clear aging inventory and recover tied-up capital.
• Reevaluate your product mix regularly: Identify underperforming products and prioritize best-sellers that contribute most to turnover.
• Improve forecasting accuracy: Use historical data and seasonal trends to predict demand more effectively and align inventory levels accordingly.
• Optimize pricing and terms: Ensure your pricing strategy remains competitive and adjust payment terms if needed to stimulate demand.
• Train your team on inventory best practices: Equip staff with knowledge of processes like FIFO and cycle counting to maintain inventory efficiency.
• Automate reordering rules where applicable: Set system triggers for restocking based on real-time sales data or seasonal trends.

Why OrderEase Matters

OrderEase is a robust B2B order management platform designed to simplify and optimize your wholesale order workflows. Rather than replacing your ERP or inventory systems, it seamlessly integrates with them to provide a unified, centralized hub for all your orders.

With OrderEase, you can:

• Centralize orders efficiently: Consolidate all orders from multiple channels into one streamlined system, eliminating silos and enhancing visibility.
  
  
• Integrate seamlessly with ERP and accounting: Automatically sync accurate sales data with your back-end systems in real time, ensuring consistent and reliable data across platforms.
  
  
• Minimize errors and manual tasks: Automate order capture to reduce manual data entry, lowering the risk of mistakes and freeing your team to focus on higher-value activities.
  
  
• Enhance user experience for customers and reps: Empower your sales reps and customers with an intuitive, accessible ordering experience anytime, anywhere, improving order accuracy and satisfaction.
  
  

By leveraging OrderEase to accelerate and refine your order lifecycle, your business delivers cleaner, more reliable data to inventory systems. This improved data flow supports better inventory turnover, reduces waste, and drives stronger profitability.

Conclusion

Understanding and optimizing your inventory turnover ratio is essential for maintaining a healthy, efficient wholesale business. It’s not just about how fast you sell, it’s about balancing stock levels to meet demand without tying up unnecessary capital.

By mastering how to calculate inventory turnover and recognizing what a good ratio looks like for your business, you gain a powerful tool to improve cash flow and operational agility.

While inventory management remains the domain of your ERP and specialized systems, the backbone of effective inventory turnover is clean, accurate order data. That’s where OrderEase shines. streamlining your order process across channels, reducing errors, and providing real-time sales visibility.

With OrderEase, you empower your inventory and finance teams with the insights they need to make smarter purchasing and stocking decisions.

Book a demo.

FAQs

Is 2 a good turnover ratio?

It depends on your business model, but generally, a turnover ratio of 2 is considered low. It may indicate excess inventory or slow-moving products.

Why is inventory turnover ratio important?

It reflects how efficiently you’re selling and restocking inventory. A healthy ratio helps improve cash flow, reduce holding costs, and minimize waste.

How can I improve my inventory turnover ratio?

Refine your purchasing decisions, clear out slow-moving stock, improve forecasting, adjust pricing, and streamline your order process for better visibility and accuracy.

Is a higher inventory turnover ratio always better?

Not always. While higher turnover often means faster sales, it can also lead to stockouts if not managed properly. The key is balance.

What is a good inventory turnover ratio for retail?

There’s no one-size-fits-all number, but many retail businesses aim for a ratio between 4 and 6. What matters most is consistency and alignment with your business goals.