How to calculate inventory turnover and days in inventory

The formula: the same period and cost basis

Inventory turnover = cost of goods sold during the period / average inventory value during the period. This measurement is presented in Shopify’s documentation. Do not divide sales revenue at selling prices by inventory at cost and call it the same metric.

A simple method: average inventory = (opening inventory + closing inventory) / 2. When inventory fluctuates significantly, averages from more frequent observations may better reflect reality. Keep product groups, warehouses and recording methods consistent across the numerator and denominator.

A hypothetical 90-day example

Assume a product group has opening inventory of VND 120 million and closing inventory of VND 80 million, both at cost. The simple average is (120 + 80) / 2 = VND 100 million. Cost of goods sold over the 90 days is VND 300 million. Turnover is 300 / 100 = 3 times during the period.

The corresponding average days in inventory under this model = days in the period / turnover = 90 / 3 = 30 days. Do not automatically multiply or divide by 365 when the data covers only 90 days. The example is entirely hypothetical and does not account for possible changes between the two inventory observations.

Average days in inventory differs from days of stock remaining

The 30-day figure describes turnover speed using the past period’s data. It does not establish that current inventory can cover the next 30 days of sales. A unit-based estimate is currently sellable quantity / average daily sales, assuming demand resembles the measurement period.

A hypothetical example: 60 sellable products with average sales of 5 per day gives a simple estimate of 12 days. If demand changes or the data contains many stockout days, the estimate must be reconsidered. When average sales are zero, this division cannot establish when stock will run out.

Five mistakes to check before using the result

The first is mixing selling prices with costs. The second is comparing annual cost of goods sold with one month’s average inventory. The third is omitting a warehouse’s inventory from the denominator while retaining its sales in the numerator. The fourth is using opening and closing figures despite major fluctuations without noting the limitation. The fifth is treating historical days as a certain forecast.

For returns, damaged goods and adjustments, agree on treatment with the data owner. If using software reports, read field definitions and scope before comparing them with a manual calculation. Two reports with the same name may use different data or methods.

Use the metric to ask operational questions

Lower turnover may relate to pre-season purchasing or a slow-selling product group. Higher turnover may accompany improved sales, but may also reflect low inventory and frequent stockouts. Look at SKU details alongside the ability to serve customers.

A review should finish with questions to investigate: which SKUs increased inventory, whether demand changed and whether records match reality. Only then consider replenishment, transfers or stock-clearance programs. Do not use a single ratio to conclude that a business has healthy cash flow.

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