Updated:
December 30, 2025
12 min
The Silent Cash Drain Sitting in Your Warehouse
Every dollar sitting in your warehouse is a dollar not working for your business. That skincare inventory collecting dust? That's rent on warehouse space, insurance premiums, and opportunity cost of capital-all while the products slowly approach obsolescence.
$142,000 excess inventory on average above demand requirements. For Australian and New Zealand organisations, this figure climbs to over $200,000. That's capital trapped in products that aren't selling fast enough.
Inventory turnover measures how efficiently you convert inventory investment into revenue. A low turnover ratio means you're overstocked, over-invested, and under-optimised. A high turnover ratio means you're efficiently matching supply to demand-and freeing up capital for growth.
10.19 average ratio in Q4 2024, marking notable efficiency improvements across ecommerce. If your ratio sits significantly below this benchmark, you're leaving money on the table-or rather, leaving it on warehouse shelves.
The True Cost of Slow-Moving Inventory
Inventory carrying costs are insidious. They don't appear as a single line item on your P&L-they're distributed across multiple expenses that obscure the true cost of overstocking.
Component Costs of Inventory Holding:
Cost Category | Typical % of Inventory Value | Example ($100K Inventory) |
|---|---|---|
Storage/Warehousing | 2-5% | $2,000-$5,000 |
Insurance | 1-3% | $1,000-$3,000 |
Shrinkage/Damage | 2-5% | $2,000-$5,000 |
Obsolescence | 5-15% | $5,000-$15,000 |
Capital Cost | 8-12% | $8,000-$12,000 |
Total Annual Carrying Cost | 18-40% | $18,000-$40,000 |
That $100,000 in slow-moving inventory doesn't just sit there passively-it actively costs you $18,000-$40,000 annually. And 30% value depreciation from low turnover and obsolescence, particularly for fashion and consumer goods.
When you calculate carrying costs against turnover, the math becomes stark: turning inventory 4 times per year with 25% carrying costs means each unit costs 6.25% of its value just to hold per turnover cycle. Turn that same inventory 12 times, and holding cost drops to 2% per cycle.
Faster turnover doesn't just free up capital-it reduces the cost of every unit sold.
The Inventory Turnover Formula
Basic Formula:
> Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory Value
Days in Inventory (DII):
> Days in Inventory = 365 ÷ Inventory Turnover Ratio
The ratio tells you how many times you sell through your average inventory in a year. Days in inventory tells you how long, on average, products sit before being sold.
Example Calculation:
An Australian homewares retailer:
Annual COGS: $840,000
Beginning inventory: $180,000
Ending inventory: $160,000
Average inventory: ($180,000 + $160,000) ÷ 2 = $170,000
Inventory Turnover = $840,000 ÷ $170,000 = 4.94
Days in Inventory = 365 ÷ 4.94 = 74 days
This retailer turns inventory roughly 5 times per year, with products sitting an average of 74 days before sale.
Inventory Turnover Calculator Template
Use this calculator to determine your inventory turnover and benchmark against industry standards.
Step 1: Gather Your Data
Input | Your Value | Example |
|---|---|---|
Annual Cost of Goods Sold | $_____ | $720,000 |
Beginning Inventory Value | $_____ | $95,000 |
Ending Inventory Value | $_____ | $85,000 |
Estimated Annual Carrying Cost % | _____% | 25% |
Step 2: Calculate Average Inventory
> Average Inventory = (Beginning + Ending) ÷ 2
Example: ($95,000 + $85,000) ÷ 2 = $90,000
Step 3: Calculate Turnover Ratio
> Inventory Turnover = COGS ÷ Average Inventory
Example: $720,000 ÷ $90,000 = 8.0 turns per year
Step 4: Calculate Days in Inventory
> Days in Inventory = 365 ÷ Turnover Ratio
Example: 365 ÷ 8.0 = 45.6 days
Step 5: Calculate Annual Carrying Cost
> Annual Carrying Cost = Average Inventory × Carrying Cost %
Example: $90,000 × 25% = $22,500 per year
Step 6: Calculate Carrying Cost Per Turn
> Carrying Cost per Turn = Annual Carrying Cost ÷ Turnover Ratio
Example: $22,500 ÷ 8.0 = $2,812 per turnover cycle
Inventory Turnover Benchmarks by Category
10.86 retail benchmark, meaning retailers restock their entire inventory over 10 times per year on average. However, this varies dramatically by category.
Australian Ecommerce Turnover Benchmarks:
Category | Target Turnover | Days in Inventory | Good | Warning |
|---|---|---|---|---|
Fast Fashion | 10-15 | 24-36 days | >10 | <6 |
Fashion (General) | 6-10 | 36-60 days | >6 | <4 |
Beauty/Skincare | 6-8 | 46-60 days | >5 | <4 |
Health/Supplements | 8-12 | 30-46 days | >7 | <5 |
Home/Garden | 4-6 | 60-90 days | >4 | <3 |
Electronics | 4-6 | 60-90 days | >4 | <3 |
Food/Beverage | 12-20 | 18-30 days | >10 | <8 |
Pet Supplies | 6-8 | 46-60 days | >5 | <4 |
6.0-12.0 fashion range, meaning inventory moves every 30 to 60 days, while fast fashion brands often exceed 15 by introducing new styles weekly.
Why Categories Differ:
Perishability: Food and beverages turn quickly because they expire
Seasonality: Fashion has seasonal cycles requiring faster clearance
Product lifecycle: Electronics face rapid obsolescence
Purchase frequency: Consumables (supplements, pet food) have steady replenishment demand
Price point: Higher-ticket items (furniture, electronics) have longer consideration cycles
The Inventory Efficiency Framework
The Inventory Efficiency Framework provides a systematic approach to optimising inventory turnover across your product portfolio.
In my experience, most ecommerce operators make two critical mistakes with inventory: they measure turnover at the aggregate level, and they use the same turnover targets for all SKUs. A supplement brand I worked with had "acceptable" turnover at 6x, but their hero SKUs were turning 12x while 40% of their catalogue sat for over 200 days. The framework below forces the granular analysis that reveals where capital is actually trapped.
Layer 1: SKU-Level Turnover Analysis
Not all products turn at the same rate. Aggregate turnover obscures performance variation across your catalogue.
Calculate turnover by SKU or product category:
SKU Category | COGS | Avg Inventory | Turnover | Days | Status |
|---|---|---|---|---|---|
Hero Products | $320,000 | $35,000 | 9.1 | 40 | Strong |
Core Range | $280,000 | $42,000 | 6.7 | 54 | Good |
New Launches | $85,000 | $28,000 | 3.0 | 122 | Monitor |
Long Tail | $35,000 | $25,000 | 1.4 | 261 | Problem |
Total | $720,000 | $130,000 | 5.5 | 66 | - |
This analysis reveals that the blended turnover of 5.5 masks significant variation. Long-tail products with 1.4 turnover and 261 days inventory are destroying capital efficiency.
Layer 2: ABC Analysis
Classify inventory by contribution to revenue and margin:
Category A (Stars): High revenue, high turnover
Typically 20% of SKUs generating 80% of revenue
Maintain stock, optimise reorder points
Accept higher safety stock to prevent stockouts
Category B (Workhorses): Moderate revenue, moderate turnover
30% of SKUs generating 15% of revenue
Standard inventory management
Monitor for movement to A or C
Category C (Long Tail): Low revenue, low turnover
50% of SKUs generating 5% of revenue
Minimise inventory investment
Consider discontinuation or liquidation
Layer 3: Inventory Optimisation Actions
Based on analysis, take category-specific actions:
For High-Turnover Products:
Increase reorder frequency to reduce average inventory
Negotiate better terms with suppliers based on volume
Consider just-in-time inventory approaches
For Low-Turnover Products:
Reduce safety stock levels
Run promotions to clear slow movers
Bundle with high-turnover products
Consider discontinuation for persistent underperformers
For Seasonal Products:
Plan pre-season inventory based on historical turnover
Set aggressive clearance timelines
Use pre-orders to reduce inventory risk
The Cash Flow Connection
Inventory turnover directly affects cash conversion cycle-the time between paying for inventory and receiving cash from customers.
Cash Conversion Cycle Formula:
> CCC = Days in Inventory + Days Sales Outstanding - Days Payable Outstanding
Example:
Component | Days | Impact |
|---|---|---|
Days in Inventory | 66 | Cash tied up |
Days Sales Outstanding | 3 | (Credit card settlement) |
Days Payable Outstanding | 30 | Supplier credit |
Cash Conversion Cycle | 39 days | Net cash requirement |
Reducing days in inventory from 66 to 45 (improving turnover from 5.5 to 8.1) cuts CCC from 39 days to 18 days-halving working capital requirements.
Working Capital Impact:
> Working Capital Reduction = (DII Improvement ÷ 365) × Annual COGS
Example: (21 days ÷ 365) × $720,000 = $41,425 freed up
That's capital available for marketing, inventory in faster-moving products, or reducing debt.
Improving Inventory Turnover: The 60-Day Playbook
Phase 1: Analysis (Days 1-15)
Week 1: Data Collection
Export 12 months of sales and inventory data
Calculate SKU-level turnover for top 100 products
Identify bottom 20% performers by turnover
Week 2: Segmentation
Complete ABC analysis
Calculate carrying cost by category
Identify candidates for clearance/discontinuation
Phase 2: Quick Wins (Days 16-35)
Week 3: Clearance Initiatives
Launch sale on slowest-moving inventory
Create bundles pairing slow movers with hero products
Contact wholesale/liquidation channels for deep-discount options
Week 4-5: Reorder Optimisation
Reduce safety stock on Category C items
Increase reorder frequency on Category A items
Adjust reorder points based on lead time analysis
Phase 3: Structural Improvements (Days 36-60)
Week 6-7: Demand Planning
Implement forecasting based on historical turnover
Set inventory targets by category
Establish seasonal planning protocols
Week 8-9: Process Implementation
Schedule monthly turnover reviews
Create alerts for products exceeding target DII
Implement automatic reorder triggers
Common Turnover Mistakes
Mistake 1: Optimising Aggregate Turnover Only
Aggregate metrics hide problem SKUs. A blended 8.0 turnover might include hero products at 15 and long-tail at 2. Optimise at the SKU level.
Mistake 2: Excessive Safety Stock "Just in Case"
Fear of stockouts leads to over-ordering. 40% lost sales from stockouts, but over-stocking is equally damaging to cash flow. Find the balance through data, not anxiety.
Mistake 3: Ignoring Seasonality
Comparing December inventory levels to February turnover creates misleading metrics. Use rolling averages and seasonal adjustments.
Mistake 4: Chasing Turnover at the Expense of Service
Aggressive inventory reduction can cause stockouts on high-demand products. Optimise by category-accept lower turnover on essential items to maintain availability.
Mistake 5: Not Accounting for Lead Times
Short lead times allow lower inventory levels. Long lead times (international suppliers) require more buffer stock. Factor lead time into reorder calculations.
Inventory Turnover and Profitability
Higher turnover generally correlates with higher profitability-but not always linearly.
The Profitability Curve:
Turnover Level | Typical Impact | Risk Level |
|---|---|---|
Very Low (<3) | High carrying costs, obsolescence risk | High |
Low (3-5) | Above-average carrying costs | Moderate |
Optimal (6-10) | Balanced costs and availability | Low |
High (10-15) | Low costs, potential stockout risk | Low-Moderate |
Very High (>15) | Minimal costs, high stockout risk | Moderate |
8+ top performer ratio, indicating efficient stock movement and healthy cash flow.
Gross Margin Return on Inventory (GMROI):
GMROI combines turnover with margin to measure true inventory productivity:
> GMROI = (Gross Margin % × Inventory Turnover)
Example:
Gross Margin: 55%
Inventory Turnover: 7.5
GMROI = 55% × 7.5 = 4.125 (or $4.13 gross margin per $1 of inventory)
Compare GMROI across products to identify which deserve more inventory investment.
Monitoring and Continuous Improvement
Weekly Metrics Dashboard
Metric | Formula | Target |
|---|---|---|
Weeks of Supply | Current Inventory ÷ Weekly COGS | 4-8 weeks |
Stockout Rate | SKUs out of stock ÷ Total SKUs | <5% |
Inventory Aging | % of inventory >90 days old | <15% |
Turnover Trend | Current vs. prior period | Improving |
Monthly Review Checklist
1. Calculate turnover by product category 2. Review inventory aging report 3. Identify candidates for clearance 4. Adjust reorder points based on demand changes 5. Update seasonal forecasts
Quarterly Strategic Review
1. Complete ABC analysis refresh 2. Evaluate category-level GMROI 3. Review supplier lead times and terms 4. Assess new product launches against turnover targets 5. Set turnover targets for next quarter
The New North Star Metric: Inventory Productivity Index
Stop tracking turnover as your primary inventory metric. Start measuring Inventory Productivity Index (IPI)-a composite score combining turnover velocity, margin contribution, and stockout performance.
The Calculation:
Interpretation:
IPI > 100: Exceeding targets-inventory working harder than planned
IPI 80-100: On track-meeting productivity expectations
IPI 60-80: Underperforming-one or more components lagging
IPI < 60: Critical-significant inventory productivity issues
This index prevents single-metric optimisation. High turnover achieved by accepting stockouts lowers IPI. High margins achieved by holding slow inventory lowers IPI. Only balanced performance drives high scores.
The Cash Flow Lever
Inventory turnover isn't just an operations metric-it's a cash flow lever, a profitability driver, and a competitive advantage. The brands that turn inventory efficiently reinvest faster, respond to market changes quicker, and waste less capital on products customers don't want.
Calculate your turnover. Segment your SKUs. Optimise relentlessly.
Your warehouse is either a profit centre or a cash drain. Turnover determines which.
