Why inventory turnover matters to a first-time founder
Turnover connects stock decisions to cash, storage costs and demand. A low rate may reveal over-ordering, weak sales or obsolete products, while an unusually high rate can signal shortages and missed orders. Compare similar periods and products because healthy rates vary widely by industry, season and business model.
Examples of inventory turnover
A shop records ₦240 million of annual cost of goods sold and average inventory of ₦40 million. Its inventory turnover is 6: divide ₦240 million by ₦40 million. That means it sold inventory equal to its average stock six times during the year, not that every item sold exactly six times.
Common misunderstanding
It is not the same as revenue growth or the number of individual products sold. The usual calculation uses cost of goods sold, not sales revenue, divided by average inventory. Different accounting methods and seasonal stock levels can distort comparisons, so use consistent figures and periods.
When to use it
Calculate it monthly or quarterly once physical stock ties up meaningful cash. Track it by product category to find slow movers, then investigate before discounting or reordering. Ignore a single benchmark without context; use trends alongside stockouts, lead times and margins when setting purchasing plans.