inventory turnover
Inventory turnover measures how many times a business sells and replaces its stock within a period, showing whether goods are moving or gathering dust.
In plain English
The woman who sells frozen chicken and turkey at the popular market in Alaba has a rule she never breaks. Whatever she buys on Monday must be sold out by the following Monday, because the generator fuel to keep that freezer running costs money every single day, and chicken that sits too long starts smelling like trouble.
That instinct she has, the one that makes her restock small small instead of buying six months of stock at once, is exactly what inventory turnover measures in a proper business sense. It tells you how many times a company sells through its stock and replaces it within a given period, usually a year.
The formula is simple. You take the cost of goods sold for the period and divide it by the average inventory value. A supermarket chain in Lagos with a turnover of 12 is basically clearing its shelves and restocking once a month. A furniture company with a turnover of 2 is sitting on sofas for six months before anyone buys them.
High turnover generally means healthy demand and cash moving fast, which matters a lot because stock sitting in a warehouse is money that cannot pay salaries or rent. But turnover that is too high can also mean a business keeps running out of stock and losing customers who got tired of waiting.
A UK example makes this easy too. A clothing retailer on the high street watching its turnover slow down during a mild winter knows immediately that the coats and jackets it ordered will need discounting before spring stock arrives, otherwise cash gets stuck in unsold jumpers.
A Lagos electronics shop has an average inventory worth ₦8,000,000 and a cost of goods sold of ₦40,000,000 for the year. Inventory turnover is 40,000,000 divided by 8,000,000, which equals 5. The shop is clearing and replacing its stock five times a year, roughly every ten weeks.
Questions people ask
Is a higher inventory turnover always better?
Not always. It usually signals strong sales and efficient cash use, but if it is too high compared to competitors, it can mean the business keeps running out of stock and turning away customers, which costs sales too.
What counts as a good inventory turnover ratio?
It depends heavily on the industry. Perishable goods sellers like food vendors want very high turnover, often monthly or faster, while businesses selling cars or heavy machinery naturally turn stock over much more slowly, sometimes just two or three times a year.
How is average inventory calculated for this ratio?
Add the value of inventory at the start of the period to the value at the end, then divide by two. This smooths out swings from bulk buying at one point in time and gives a fairer average figure to work with.
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