FORMULA
The inventory turnover formula.
COGS divided by average inventory. Annualised when the period is not 365 days. Average inventory means (beginning plus ending) over two, or a twelve-month average for seasonal books.
The two variants
| Variant | Formula | Use when |
|---|---|---|
| COGS-based (preferred) | COGS / avg inventory | Reporting to lenders, board, auditors |
| Sales-based (legacy) | Sales / inventory | Internal retail flash, with caveats |
The COGS variant is preferred under GAAP because both numerator and denominator are stated at cost, avoiding the gross-margin inflation embedded in the sales variant.
Annualisation
For a partial period of d days, annualised COGS equals period COGS multiplied by 365 over d. The turnover ratio then divides this annualised figure by the average inventory measured across the same period.
Average vs ending inventory
Average inventory smooths month-to-month swings and is the default. Ending inventory is permitted in steady-state businesses but distorts seasonal results. See average vs ending inventory.
Edge cases
- Zero or negative inventory in the denominator. Use a small positive floor, flag separately.
- FIFO vs LIFO swings. Reconcile both to FIFO before benchmarking.
- Intercompany inventory. Eliminate at consolidation.
- Consignment inventory held on third-party shelves. Include if title remains with the seller.