Inventory turnover ratio for small shops: how to find the cash trapped on your shelves

A shop can be profitable on paper and still run out of cash, and the usual reason is inventory: money that left the bank account as a purchase order and hasn’t come back yet as a sale. Inventory turnover is the number that tells you how fast that round trip happens, and most small shops never calculate it per SKU — only as a vague sense that “some stuff isn’t moving.” That vagueness is expensive. A precise number tells you exactly which SKUs are tying up capital and for how long.

The formula

Inventory turnover = cost of goods sold (COGS) over a period ÷ average inventory value over that period

Average inventory is usually (beginning inventory + ending inventory) ÷ 2, valued at cost, not retail price. A turnover of 6 means you sold through your average inventory value six times over the period measured — typically a year. A turnover of 2 means the same stock is sitting for roughly half a year before it sells.

Turnover on its own is hard to feel, so convert it to days of stock, which is more intuitive:

Days of stock = 365 ÷ turnover

A turnover of 6 is about 61 days of stock — two months from purchase to sale, on average. A turnover of 2 is about 182 days — six months. That is the number to say out loud to yourself: “this product sits on the shelf for six months before it sells,” because that is what a turnover of 2 actually means in cash terms.

The 90-day test for each SKU

Turnover computed once a year for the whole shop hides everything useful, because it averages a fast-moving bestseller against a slow dud. The fix is to compute it per SKU, over a rolling 90-day window, and apply a simple test: did this SKU sell through at least once in the last 90 days at its current stock level? If days of stock for a SKU is under 90, it passed. If it’s well over 90, it’s a candidate for a markdown, a bundle, or simply not reordering.

The 90-day window is short enough to catch a slowdown before it becomes a year of dead capital, and long enough to smooth out normal week-to-week noise. Run it monthly and a SKU that starts slipping shows up in month two, not month eleven.

A worked example with three SKUs

Consider a small shop with three products. SKU A is a bestseller: $18,000 in COGS sold over 90 days, average inventory value of $2,200 at cost. Turnover for the 90-day period is 18,000 ÷ 2,200 = 8.2, which annualizes (×4) to about 32.7 — extremely fast, roughly 11 days of stock. This SKU should almost never be out of stock; running low costs more in lost sales than the carrying cost ever would.

SKU B is a steady mid-mover: $4,500 in COGS over 90 days, average inventory of $2,100. Turnover for the period is 2.1, annualized to about 8.6, or roughly 42 days of stock. Healthy, unremarkable, reorder on a normal cycle.

SKU C is the problem: $600 in COGS sold over 90 days, but average inventory value sitting at $3,000 — someone overordered a season ago. Turnover for the period is 0.2, annualized to about 0.8, meaning roughly 456 days of stock at the current pace. That $3,000 of inventory is not an asset sitting quietly on a shelf; it is $3,000 of cash the shop cannot use to buy SKU A, pay rent, or cover payroll, and it will still be mostly there in a year at this rate.

Across the three SKUs, $5,300 in average inventory value is tied up, and $3,000 of it — 57% of the total capital — belongs to the one SKU generating 8% of the sales. That imbalance is invisible in a single blended turnover number and obvious the moment you compute it per SKU.

Reorder point: buying enough without overbuying

Turnover tells you what’s already stuck. Reorder point tells you how to avoid creating the next stuck SKU while also not running out of the fast movers.

Reorder point = (average daily sales × lead time in days) + safety stock

For SKU A, average daily sales are roughly $18,000 ÷ 90 ÷ average unit cost — say that works out to 14 units a day. Lead time from the supplier is 10 days. Base reorder need is 140 units. Add safety stock of, say, 3 days’ worth (42 units) to cover a late shipment or a sales spike, and the reorder point is 182 units: order more the moment stock on hand drops to that level.

For SKU C, daily sales are under 1 unit. Even with the same 10-day lead time, the reorder point is close to zero, and the honest answer is not to reorder at all until the existing 456 days of stock is closer to gone. Applying the same reorder logic to every SKU without checking turnover first is exactly how a shop ends up with three SKU-C situations at once.

Turning it into a monthly habit

The routine that keeps capital moving: pull COGS sold and average inventory value per SKU for the trailing 90 days; compute turnover, days of stock, and a pass/fail against the 90-day test; compute reorder point from daily sales and lead time for every SKU that passed; flag anything that failed with a specific action — markdown, bundle, or stop reordering — instead of a vague “review inventory” note that never gets acted on.

The Inventory Capital & Reorder Planner automates this: paste your SKU-level sales and inventory data and it computes turnover, days of stock, and a reorder point per SKU, with a clear pass/fail against the 90-day test and a running total of capital tied up in slow stock. Even without it, the formula is enough on its own: turnover equals COGS divided by average inventory, days of stock equals 365 divided by turnover, and reorder point equals daily sales times lead time plus safety stock — run all three per SKU, not once for the whole shop.