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As an online brand or eCommerce company inventory is your most important asset and the inventory turnover rate shows how quickly you turn it over. Before we get into how you can improve your inventory turnover rate, let's start by reviewing how to calculate it. The formula looks like this: cost of goods sold / average inventory.

Let's take an example. Over a year, you sell 500 packages of coffee. On average, there are 100 packages of coffee in stock during the year. 500:100 = 5, thus a ratio of 5:1.

You can typically find the cost of goods sold (often referred to as COGS) in the company's inventory management software, or in the income statement and balance sheet. If it's the latter, take the inventory value at the beginning of the year + purchases - inventory at the end of the year.

You calculate the average inventory by checking the balance sheet and taking the inventory at the beginning of the year + the inventory at the end of the year / 2.

It is also possible to consider a shorter period than a full year. In the accounting software you use, such as Fortnox, you can extract an income statement and balance sheet for any period.

Once you have the average turnover rate, you can also easily calculate how long it takes on average to sell the inventory by dividing the number of days in the year by the ratio. In the case above, it would be 365 / 5 = 73 days.

So, what is a good inventory turnover rate? The boring answer is that it depends. But generally, higher is better than lower, as it indicates:

strong sales
lower cost to hold inventory
less capital tied up in inventory (which means more freedom to invest the money in other things such as marketing, product development, salaries, etc.).

At the same time, an excessively high turnover rate may mean that there are too few products in stock.

What is a good value depends on the industry you are in. For example, in the fashion industry, a common perception is that 4 to 6:1 is a good turnover rate.

How can you improve inventory turnover?

Consider pricing. Can it be optimized to turn over goods faster?
A promotion can always boost inventory turnover. But consider your ROI as profitability decreases.
Adjust the purchase frequency. The more often you buy smaller orders, the less you will have in stock. But be vigilant about how it affects your relationship with suppliers and what it means for logistics costs.
Compare products in the warehouse. Which products sell faster and better? By focusing on the right products, the inventory turnover rate can be improved.
Keep track of the trend over time, preferably week by week or month by month, to identify deviating patterns.

Extending payment terms with a solution like Waylog's is one of the easiest ways to cover the gaps in your company's cash conversion cycle. By paying suppliers for you and postponing the payment between 30 and 120 days, Waylog's customers have room to allocate working capital to critical daily expenses instead.

Cash flow is about using the right resources at the right time. Developing a perfect strategy is not easy. Having access to different tools is important to be prepared to quickly handle unexpected challenges in the business.

How inventory turnover works