# Inventory Turnover Ratio: How to Calculate and Improve It *How many times a year do you sell through your inventory? One metric exposes your slow-moving goods and measures the health of your cash.* > **In short:** What is inventory turnover and how do you calculate it? Turnover = COGS ÷ average inventory. A practical guide with Saudi examples, days on hand, and fixes. - **URL:** https://www.snad.io/en/blog/muaddal-dawaran-makhzun - **Arabic original:** https://www.snad.io/blog/muaddal-dawaran-makhzun - **Category:** Guides — Business & Inventory Management - **Tags:** inventory turnover, inventory management, days on hand, cost of goods sold, slow-moving inventory, performance indicators - **Published:** 2026-06-11 - **Updated:** 2026-08-02 - **Publisher:** Snad (snad.io) Inventory turnover is the number of times you sell through your entire inventory and replace it within a period. You calculate it by dividing cost of goods sold by average inventory. The higher the ratio, the faster your inventory moves and the less cash sits idle on your shelves. It also translates into days on hand = 365 ÷ turnover ratio. This metric exposes slow-moving goods and measures the health of your liquidity. This guide covers the formula, worked examples, and practical steps to improve turnover. ## What inventory turnover is Inventory turnover is **the number of times you sell through your entire inventory and replace it within a period** (usually a year). The higher the ratio, the faster your inventory moves, and the less cash sits idle on your shelves. The metric combines the sales lens and the inventory lens in a single number. That reveals what sales figures alone hide: are you selling efficiently, or piling up slow-moving goods that eat your cash and your floor space? ## The formula, step by step The calculation takes two steps: - **Average inventory** = (opening inventory + closing inventory) ÷ 2. - **Turnover ratio** = cost of goods sold ÷ average inventory. What matters is using **cost of goods sold** in the numerator, not sales at the selling price, because inventory is valued at cost as well. That keeps the comparison consistent. Mixing the selling price with cost inflates the ratio and gives you a false picture. ## A worked example for a retail store Take a store with cost of goods sold of SAR 1,200,000 for the year, opening inventory of 180,000 and closing inventory of 220,000: - Average inventory = (180,000 + 220,000) ÷ 2 = **SAR 200,000**. - Turnover ratio = 1,200,000 ÷ 200,000 = **6 times a year**. In other words, the store sells through its entire inventory and replaces it six times a year — roughly once every two months. ## Days on hand: the companion metric **Average days on hand** translates the turnover ratio into days anyone can grasp: - **Days on hand** = 365 ÷ turnover ratio. In our example: 365 ÷ 6 ≈ **61 days**. Each item sits in the warehouse for about two months before it sells. The fewer the days, the faster your cash is freed up and the lower the risk of obsolescence and spoilage. This metric is also easier to explain to your team than a bare turnover figure. ## What counts as a good ratio for your business There is no single ideal number — it varies by sector: - **Fresh food and restaurants**: very high turnover (dozens of times) because the product is perishable. - **General retail and apparel**: moderate turnover (4–8 times). - **Durable goods and spare parts**: naturally low turnover. What matters most is comparing your ratio against your sector average and against your own history. A downward trend across quarters is a warning sign regardless of the absolute number. ## Why low turnover threatens your liquidity Slow inventory is not just a line on a statement — it is **frozen cash**: - Capital locked up that could have been working in fast-selling goods. - Storage and insurance costs, plus the risk of spoilage and obsolescence. - The risk of forced markdowns to clear slow-moving items at a loss. Low turnover alongside a healthy book profit is a common cause of liquidity crises: the profit is there, but it is stuck on the shelves instead of in the bank account. ## Practical steps to improve turnover To lift your turnover ratio without emptying your shelves: - **Analyse with the Pareto rule**: concentrate your capital on the items that drive most of your sales. - **Identify the slow-moving items** and clear them with targeted offers before they become obsolete. - **Set a reorder point** for each item instead of buying on instinct. - **Shorten the supply cycle** by negotiating smaller, more frequent deliveries. - **Review the ratio monthly** for each item, not for inventory as a single block. ## How Snad measures your turnover automatically Snad links sales movement to inventory, so it calculates **the turnover ratio and days on hand for every item and every branch automatically** from your actual data. It highlights your slow-moving items and your fastest movers, and reminds you of the reorder point before you run out. Instead of guessing what is moving and what is sitting, you decide on live numbers that free up your trapped cash and keep your best sellers in stock. ## Frequently asked questions ### How is inventory turnover calculated? Turnover ratio = cost of goods sold ÷ average inventory, where average inventory = (opening inventory + closing inventory) ÷ 2. You must use cost in the numerator, not the selling price. ### What is the difference between the turnover ratio and days on hand? The turnover ratio measures how many times you sell through your inventory in a year. Days on hand = 365 ÷ turnover ratio, and it measures how many days an item sits in the warehouse before it sells. The second is easier to explain. ### What is a good inventory turnover ratio? There is no single ideal figure; it varies by sector. Fresh food turns over very quickly, general retail runs 4–8 times, and durable goods turn over less. Compare your ratio against your sector and against your own history. ### Why is low turnover dangerous? Because it means cash frozen on the shelves, along with storage and insurance costs and the risk of obsolescence and spoilage. You can post a book profit and still face a liquidity crisis, because the profit is trapped in inventory. ### How do I improve my inventory turnover ratio? Concentrate your capital on the best-selling items, clear slow-moving goods with offers before they become obsolete, set a reorder point for each item, shorten the supply cycle, and review the ratio monthly for each item. ### Should I use sales or cost in the calculation? Use cost of goods sold, not sales at the selling price, because inventory is valued at cost. Mixing the selling price with cost inflates the ratio and gives a misleading picture. --- ## About the publisher **Snad (سند)** — a private Saudi software company based in Riyadh, founded 2025. Legal form: Sole proprietorship. Commercial registration: 7038154642 VAT number: 310959226500003 Only official domain: snad.io > Snad is a private commercial business-management platform. It is not a > government body, not a bank, and not a government services portal, and it > is not affiliated with any government entity. Any site or app with a > similar name is unrelated to Snad.