The inventory turnover ratio is a key metric for product-based businesses, measuring how efficiently you convert inventory into revenue. It’s especially important in periods of uncertainty, when financial agility becomes increasingly essential for success.
On that note, the U.S. Economic Policy Uncertainty Index reached 975.60 in April 2025—higher than at any point since the peak of the COVID-19 pandemic. In other words, now’s a good time to make sure your inventory turnover is where it should be.
Here’s what you should know to do just that, including what a good inventory turnover ratio is, why it matters and what steps you can take to improve it.
What Is Inventory Turnover?
The inventory turnover ratio is a financial metric that measures the number of times your business sold and replaced its inventory during a given period. Tracking it monthly, quarterly or annually can help inform your strategic decisions.
Inventory turnover helps reveal how efficiently you moved your products off the shelves, converting them into revenue. More specifically, it provides insight into the strength of your sales and inventory management.
A higher inventory turnover ratio indicates you’re selling and replacing your stock faster. This suggests stronger sales or tighter inventory management, both of which benefit your financial performance and cash flow.
In contrast, a lower inventory turnover ratio means that it takes you longer to sell off your stock. This may stem from a lower demand for your products or a tendency to carry more inventory than you need.
How to Calculate Inventory Turnover
You can calculate the inventory turnover ratio using the following formula:
Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory*
*To calculate average inventory for a given period, simply add the beginning and ending inventory values, then divide them by two.
For example, imagine you own a retail clothing business. During 2025, you had a $210,000 beginning inventory. Your cost of goods sold (COGS) for the year was $800,000, and your ending inventory was $190,000.
To calculate your inventory turnover ratio for the year, you first have to calculate your average inventory:
($210,000 + $190,000) ÷ 2 = $200,000 average inventory
With that, we can complete the inventory turnover calculation:
Inventory Turnover Ratio = $800,000 COGS ÷ $200,000 average inventory = 4
This means you sold and replaced your inventory four times during 2025.
Inventory Turnover Ratio vs. Days Sales in Inventory Formula
The inventory turnover ratio is often used in combination with the days sales in inventory (DSI) formula, also known as the days inventory outstanding (DIO) or inventory days calculation. Under any name, it tells you the average number of days it took to turn your inventory over during a given period.
Here’s how to calculate DSI from scratch:
DSI = (Average Inventory ÷ Cost of Goods Sold) × Number of Days in the Period
Let’s use the numbers from the example in the previous section to demonstrate.
DSI = ($200,000 average inventory ÷ $800,000 COGS) x 365 days = 91.25 days
This means that it took you an average of roughly 91 days to turn over your inventory, which lines up with a turnover ratio of four.
Pro Tip: If you already know your inventory turnover ratio for a given period, you can divide the number of days in the period by the ratio to calculate your DSI. For example, 365 days divided by four equals 91.25 days.
Why Inventory Turnover Matters
Inventory turnover isn’t just a tool to gauge the strength of your sales or inventory management. It also strongly correlates with your broader operational resilience, and improving it can be a valid tactic for driving long-term efficiency.
When your business turns inventory over more frequently, it means you’re converting products into cash flows faster. That increases liquidity and generates working capital, which you can use to meet obligations and take advantage of growth opportunities.
In addition, moving products off the shelves more quickly can help to minimize carrying costs, like storage and insurance. It can also reduce indirect expenses, such as spoilage, obsolescence, and shrinkage due to theft or damage.
These benefits are critical during periods of economic uncertainty like 2025, when new tariffs threaten to disrupt global supply chains and drive already inflated prices even higher.
What Is a Good Inventory Turnover Ratio?
Generally, a higher inventory turnover ratio is better, indicating that products are selling well and you aren’t carrying excess stock. However, an overly inflated ratio could mean you’re not holding enough inventory to meet demand, which could result in lost sales.
Because of this, what qualifies as a good inventory turnover ratio for your business depends on the broader context. Some of the most significant factors to consider include your industry, product characteristics and profit margins.
For example, grocery stores often have very high inventory turnover ratios. Not only are their goods perishable, but they also tend to have relatively low profit margins. As a result, they have to sell a large volume of products daily to stay afloat.
In contrast, furniture retailers tend to have lower ratios. Their products last much longer and have a higher price point. This allows them to turn a profit even though customers buy their goods less frequently.
To determine what a good inventory turnover ratio is for your business, consider starting with industry benchmarks. You can often find them in trade publications, industry-specific reports or financial databases.
For example, CSI Market found the following inventory turnover ratios for various sectors in Q2 2025:
- Energy: 14.26
- Retail: 10.07
- Utilities: 7.51
- Transportation: 7.39
- Consumer Discretionary: 5.77
Pro Tip: Your inventory turnover ratio tells you relatively little without context. For instance, a decrease could be a sign that your sales are dropping, but it could just as easily mean that you stocked up on inventory ahead of a seasonal surge in demand.
How to Improve Your Inventory Turnover Ratio
Improving your inventory turnover ratio can have many benefits, including higher liquidity, profitability and resilience. Let’s look at five practical strategies you can use to increase the metric without compromising your ability to meet ongoing demand:
- Enhance demand forecasting: Consider investing in demand forecasting software, which can predict future sales using historical data and market trends. This can help you optimize your stock levels, allowing you to meet demand without holding excess inventory.
- Rationalize your SKUs: Regularly analyze stock-keeping unit (SKU) sales data to identify slow-moving or low-margin products. By weeding these out and replacing them with higher-performing goods, you can increase your inventory turnover and profitability.
- Renegotiate supplier lead times: It’s often possible to have your supplies delivered faster once you’ve established a relationship with a vendor. Shortening those lead times can reduce the inventory you need to keep on hand, improving turnover without increasing the risk of stockouts.
- Leverage pricing tactics: Strategic discounts can be an efficient way to accelerate sales, especially when you need to move aging inventory. Just be careful not to erode your profit margins too much, as it could end up harming your long-term profitability.
Get Expert Financial Guidance With Paro
Inventory turnover is a key performance indicator for product-based businesses, especially during periods of economic uncertainty. To maintain financial stability, it’s essential that you track the metric and keep it in line with industry standards.
This can be challenging for many small business owners, but fortunately, you don’t have to manage it alone. Paro can connect your company with a finance expert—like a fractional controller—who can help you improve profitability and manage disruptions in your inventory management system.
