Inventory turnover for small shops, explained

Every product on your shelf is cash you have already spent. Until it sells, that cash cannot pay rent, wages or the next delivery. Inventory turnover measures how quickly your stock turns back into money.

Two shops with the same sales can be in very different shape. One holds two weeks of stock and has cash to spare. The other holds three months of stock and is always short at the end of the month. Turnover is the number that shows the difference.

• Cost of goods sold is what you paid for the stock you sold in the period, not what you sold it for. If you only know sales, subtract your gross profit. See gross profit for shop owners.
• Average stock value is the cost value of your stock at the start of the period plus the value at the end, divided by two. A stock count gives you these.

Use cost on both sides. Mixing selling prices and cost prices makes turnover look higher than it really is.

A small grocery shop wants to know how its stock moved over the last year.

1. Stock value at start and end

   Counted stock at cost was $18,000 at the start of the year and $22,000 at the end. Average: (18,000 + 22,000) / 2 = $20,000.

2. Cost of goods sold

   Sales were $260,000 and gross margin was about 25%, so cost of goods sold was 260,000 x 0.75 = $195,000.

3. Turnover

   195,000 / 20,000 = 9.75 times a year.

4. Days on hand

   365 / 9.75 = about 37 days. On average, stock sits a little over five weeks before it sells.

Notice the stock value grew from $18,000 to $22,000 while the shop's sales stayed steady. That $4,000 is cash that went onto the shelves. Worth asking where.

There is no single right number. It depends heavily on what you sell. Fresh and fast-moving goods turn quickly. Hardware, beauty and specialty items turn slowly because customers buy them less often and shops need wide ranges.

The most useful comparison is your shop against itself. Is turnover rising or falling month to month? Which product groups pull it down?

A shop-wide figure hides the detail. A handful of fast sellers can make the average look healthy while dozens of lines sit untouched. Work it out for groups or individual products and the picture changes.

The biscuits hold almost twice as much cash as the water while selling a fraction of it. That does not mean drop them, but it might mean ordering fewer, less often. Read what to do about slow-moving and dead stock.

• Order smaller amounts more often for items your supplier can deliver frequently. Less cash sits waiting.
• Set reorder points per product so you stop over-ordering out of habit. See how to set reorder points.
• Cut the slow tail. Stop reordering lines that have not sold in months, and clear what is left.
• Give fast sellers the best spots near the counter and at eye level.
• Watch the buying trips. A big discount on a slow product is not a saving if it sits for a year.

Shopkeepa keeps stock as a record of every movement, so current inventory value is always there in reports, not only after a full count. Add costs to products and you also see gross profit, best sellers and slow movers side by side, which is most of what you need to spot where cash is stuck.

See how inventory tracking works. Shopkeepa is in development, and early access shops will help shape it.