Inventory Turnover & Average Days in Inventory

Inventory Turnover & Average Days in Inventory

Formulas

$$\text{Inventory turnover} = \frac{\text{Cost of goods sold}}{\text{Average inventory}}$$

$$\text{Average days in inventory} = \frac{365}{\text{Inventory turnover}}$$

Explanation

• Shows how many times a year inventory is sold and replaced.
• Average days in inventory: how long inventory stays on the shelf before being sold.

Satisfactory level

• Higher turnover = faster movement, less risk of obsolete stock, and usually better liquidity.
• Too high turnover may mean not enough stock, causing lost sales.

Industry norm

• Supermarket: very high turnover, low days.
• Jewellery / car dealer: low turnover, high days.

Example

• Cost of goods sold = RM900,000
• Inventory at beginning = RM150,000; end = RM210,000
• Average inventory = (150,000 + 210,000) ÷ 2 = RM180,000

$$\text{Inventory turnover} = \frac{900,000}{180,000} = 5 \text{ times}$$$$\text{Average days in inventory} = \frac{365}{5} = 73 \text{ days}$$

On average, goods stay 73 days before being sold.