Lessons · Pharmacy · inventory turnover

Inventory turnover

Turnover is the cost of the goods sold in a year divided by the average value of the stock on the shelf.

Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.

What it is for

Stock is money standing still. The owner or the district manager asks how many times the shelf turns over in a year, and the answer decides what gets ordered weekly and what stops being stocked at all.

How to think about it

Both figures are in dollars and both are given. Divide the year's cost of goods sold by the average inventory: the answer is a count of times, with no unit of money left in it. Divide 365 by that count and you have the days of stock on hand.

Worked example

Turnover = cost of goods sold / average inventory

Both in dollars, so the dollars cancel.

$1,000,000 / $125,000 = 8 times a year

The shelf empties and refills eight times.

365 / 8 = 45.6 days of stock on hand

The same fact said in days.

Higher turnover means less money asleep on the shelf

And a shorter gap before something runs out, which is the other side of it.

Your turn

Cost of goods sold is $840,000 and average inventory is $60,000. Write the turnover.

840,000 / 60,000 =  times a year

The trap

Dividing the inventory by the cost of goods sold. It gives a small decimal, and a shelf that turns over 0.07 times a year is not a business.

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