Want to improve your store’s cash flow, customer satisfaction and profit? Then you should start paying attention to your inventory turnover ratio.
Inventory turnover ratio measures how often you sell and replace stock over a given period. Achieving the right balance ensures you minimise storage costs while satisfying customer demand.
In this article, you’ll learn how to calculate your inventory turnover ratio, what a good ratio looks like and how you can improve it.
What is inventory turnover ratio?
Your store’s inventory turnover ratio (ITR) is the rate at which you sell and replenish stock in a given period.
You can use your ITR to make decisions on pricing, purchasing and marketing. You can also divide the days in the period by your inventory turnover ratio to calculate, on average, how many days it takes to sell your inventory.
Here’s how you calculate your inventory turnover ratio:
Inventory turnover ratio = cost of goods sold / average value of inventory
In the above calculation, cost of goods sold is the direct costs of purchasing or producing the items you sell. Your average value of inventory is the sum of your opening and closing inventory divided by two.
For example, if your online store records £600,000 in COGS for the year and holds an average inventory value of £150,000, your turnover ratio is 4. In other words, you’ve sold and restocked your inventory four times within the year.
Why does inventory turnover matter
Your inventory turnover ratio is a valuable tool for assessing business performance. Tracking and improving your ratio offers the following benefits:
Boost cash flow
Your cash flow improves when you turn over inventory quickly. The more you sell, the more revenue you generate. A high inventory turnover ratio also frees up working capital to invest in marketing, product development or expanding across borders.
Reduce costs
A healthy turnover ratio lowers storage and holding costs. The more inventory you hold, the more you’ll need to pay in warehouse costs and insurance.
It also increases the risk of product depreciation or obsolescence. Moving products faster lets you cut these expenses and reduce waste, which can erode margins if stock sits unsold for long periods.
Raise customer satisfaction
Turnover ratio impacts customer satisfaction. Retailers maintaining balanced inventory levels avoid stockouts or backorders that disappoint buyers and harm brand loyalty.
Proper stock availability ensures timely order fulfilment and enhances customer experience, which is especially important in competitive markets.
Increase profitability
Inventory turnover ratio affects profitability. Overstocking can tie up capital in slow-moving or obsolete goods, leading to markdowns and margin erosion.
Conversely, really high turnover causes stock shortages and lost sales. You’ll need to achieve the right balance to keep inventory investment optimal, protect profits and support sustainable growth.
Improve supplier relationships
A strong turnover ratio can enhance supplier relationships. Retailers that consistently move stock swiftly are more likely to secure favourable terms, discounts and priority from suppliers, further strengthening their market position.
What's a good inventory turnover ratio?
There’s no ideal ITR benchmark. It differs between categories and business models. For example:
- Fast-moving consumer goods (FMCG) brands will often have a ratio above 10
- Fashion and electronics retailers tend to have slightly lower ratios between six and eight
- Luxury and high-value products like jewellery and furniture tend to have much lower ratios between two and four.
A lower-than-usual ITR can be a sign of weak sales or overstocking. Whether it’s a problem with your pricing or marketing, goods aren’t flying off the shelves.
Benchmark your inventory turnover ratio using the information above or aim for the middle ground. A ratio of 6-8 will be acceptable for most retailers.
What can affect your inventory turnover ratio?
Plenty of factors affect your inventory turnover ratio, including customer behaviour and your supply chain. By understanding these factors, you can pinpoint ways to improve your ratio, reduce stock levels and increase sales.
Demand fluctuations and seasonality
Sales volumes rarely remain constant throughout the year. Peak periods drive temporary surges in demand that boost turnover, while quieter periods have the opposite effect.
Your product range
A diverse product range can dilute overall turnover if too many slow-moving SKUs compete for shelf space and working capital.
Fast-selling staples elevate your aggregate turnover ratio, while niche or newly launched lines often underperform until they gain traction. Regularly analysing SKU-level velocity and trimming underperformers allows eCommerce businesses to concentrate resources on top sellers and accelerate average turnover.
Pricing strategy
Discounts, flash sales and bundled offers can temporarily spike sales velocity and clear ageing stock. But overrelying on discounts risks eroding margins and training customers to wait for promotions. Striking the right balance between full-price sales and tactical promotions underpins a healthy, sustainable ratio.
Supply chain reliability and lead times
Long or unpredictable supplier lead times may force you to hold more safety stock, which depresses turnover. Delays translate into buffer inventory that sits unsold.
Building strong relationships with suppliers, diversifying sourcing across multiple regions and leveraging expedited delivery services can shrink lead times and reduce the need for excess buffer, lifting your turnover ratio.
Returns and wastage
High return rates inflate closing inventory figures and reduce apparent turnover. Items that become obsolete, whether due to changing consumer trends or perishable stock expiring, also weigh down the ratio.
How to fix a low inventory turnover ratio
Not happy with your ITR? Here are actionable steps you can take to boost turnover and improve cash flow.
1. Improve demand forecasting
Accurate forecasting lets you align stock levels with actual customer demand. Use historical sales data, seasonal trends and market insights to accurately predict future sales.
You can also invest in inventory management software that tracks product-level sales to avoid over-purchasing and reduce safety stock. Regularly update forecasts based on recent performance and external factors such as promotions or competitor activity.
2. Get rid of slow-moving products
Analyse your product range to find slow-moving or out-of-date items. Focus future investments on fast-selling, high-margin products while discounting underperforming ones. This streamlining helps concentrate resources on stock that turns quickly and generates revenue.
3. Optimise pricing and promotional strategies
Competitive and dynamic pricing can stimulate demand and accelerate inventory turnover. Review competitor prices to maintain market relevance without sacrificing your margin.
Implement targeted promotions such as flash sales, volume discounts or bundled offers to clear ageing inventory. Avoid excessive discounting that might harm brand perception or train customers to wait for sales.
4. Reduce lead times and improve supply chain reliability
Long supplier lead times increase the necessity for high safety stock, which can lower turnover. Work on building strong relationships with suppliers to negotiate shorter lead times or more frequent deliveries. Diversify sourcing to mitigate risks of disruptions..
5. Improve your marketing efforts
Increase customer demand by exploring new marketing channels and optimising existing ones. Experiment with social media campaigns, email marketing, SEO and influencer marketing to reach wider or more engaged audiences. Well-targeted marketing drives faster product movement and improves inventory turnover without necessarily raising costs.
Improve your inventory turnover ratio with Pro Carrier
A well-managed inventory turnover ratio is an essential ingredient for a healthy and profitable ecommerce business. By accurately calculating your ITR, comparing it with industry benchmarks and addressing underlying factors, you can strike the sweet spot between service levels and capital efficiency.
The above strategies aren’t the only way to improve your inventory turnover ratio. Working with a dedicated cross-border eCommerce delivery expert like Pro Carrier can help, too.
Our dedicated returns service makes international returns simple for online retailers. It includes a customer portal that gives you complete control over the process, allowing customers to execute and track returns from anywhere. Our carrier-agnostic approach means your customers can choose a variety of return options, too.
We even handle back-end processes like Duty Drawback and preparing your products for resale.
For more information on how Pro Carrier can improve your returns process, speak to one of our experts today.