Inventory turnover refers to the number of times a business sells and replenishes products within an allotted period of time.
The speed at which a business moves its inventory through its shop — either a brick-and-mortar location or an ecommerce website — largely influences sales and profits. Inventory turnover, and the inventory turnover ratio metric, is a helpful way of measuring how often a business sells and replaces items within a given time period.
To understand its inventory turnover ratio, the business first needs to calculate its cost of goods sold (COGS), which is the total amount it costs to sell a product. Once it has that number, the business would divide its COGS by its average inventory cost to determine the inventory turnover rate.
Having a good pulse on inventory turnover gives a business a solid understanding of its overall performance. Products that sit on shelves for too long, for example, lose out on sales and COGS. Knowing their turnover rate helps the business make strategic inventory decisions going forward.