Everything you need to sell online

Set up an online store in minutes to sell on a website, social media, or marketplaces.

Healthy Inventory Turnover Ratio for Retail Businesses

13 min read

An inventory turnover ratio is a key performance indicator that shows how much sales a business is making. For retail businesses, this number is vital, as it provides necessary data that can help make good business decisions that can boost sales.

This article will introduce the inventory turnover ratio and how it relates to the average small retail business. It will show how you can calculate the turnover ratio and its general importance. It will then walk you through what is considered a healthy inventory turnover ratio. This will help you make an informed decision on what this number might mean for your own business, and how to improve it. By the end of this article, you should have a solid baseline understanding of the inventory turnover ratio. So let’s get started.

How to sell online
Tips from e-commerce experts for small business owners and aspiring entrepreneurs.
Please enter a valid email address

What is Inventory Turnover Ratio?

Inventory turnover is a term that shows business owners the number of times they sell their products over time. Normally you calculate the inventory turnover ratio in terms of years. However, many businesses also calculate it monthly or quarterly. In retail businesses, this ratio is an important parameter that gives you the lowdown on the speed at which you sell your overall products. Therefore, armed with this number, you have a clear picture of your general financial position.

How do you calculate your inventory turnover ratio?

For any business, there is a simple formula you can use to get your inventory turnover ratio. Below is the formula:

Inventory Turnover Ratio = Amount in Sales of Products Generated/Average Inventory

To further understand how to use this formula and the effect inventory turnover ratio has, below are two examples to help you understand how this number might work in the real world.

Example 1

A retail shoe business sold £100,000 worth of sneakers in 2020, and they held an average of £50,000 in inventory. What is the inventory turnover ratio?

Inventory Turnover Ratio = £100,000/£50,000

So, their inventory turnover ratio is 2.

What to Note: From the answer obtained, it means that the retail business had to restock their entire inventory twice a year. From this, we can conclude that they are selling at a profitable rate.

Still confused? Let’s try another one.

Example 2

A hair retail business sold £200,000 worth of hair in 2019. On average they held £500,000 in inventory. What is the inventory turnover ratio?

Inventory Turnover Ratio = £200,000/£500,000

Their inventory turnover ratio is 0.4

What to Note: From the answer obtained, you might say that the retail business is holding and spending on too much inventory. They have money tied up in stock, and they are undoubtedly spending more to store them than they are making in revenue from selling.

What is a Good Inventory Turnover Ratio for Retail Businesses?

You already have an idea of the inventory turnover ratio. However, what is the direct application of this formula to your retail business? What inventory turnover should you aim for as a retail business owner. As a retail business owner, an inventory turnover ratio your business should aim for is between 2 to 4.

Why not a lower inventory turnover ratio?

A lower inventory turnover ratio than 2 shows might signal a decline in sales. This can be due to a decrease in the popularity of products, a weak marketing force, etc. It also means that you are also spending a large proportion of your budget on keeping/storing your stocks. This is something that will affect your retail business.

As a retail business, you undoubtedly want to make tremendous sales and not only remain relevant. Therefore, you should scrap having an inventory turnover ratio below 2.

Why not a higher inventory turnover ratio?

What about an inventory turnover ratio above 4? What does a high number say about your retail business?

Contrary to what you might think, an extremely high value is not a good thing for retail businesses. For example, if you have a value of 7, it can indicate a low stock level. Consequently, you might be missing out on sales because you are out of certain stock or aren’t holding enough supply to keep up with demand. Also, in terms of logistics, this might mean you are worrying more about getting your products than selling them.

Having an inventory turnover ratio of 2 to 4 will help your business perform well and help you achieve your goals without getting overwhelmed along the way.

Why It’s Important to Measure the Inventory Turnover Ratio

Not calculating your business inventory turnover ratio can result in you missing valuable data that can help you enact your business plan effectively and achieve your goals. Below are different reasons why you should calculate the inventory turnover ratio.

Inventory turnover ratio is a key performance indicator

This is one of the most valuable importance of calculating the inventory turnover ratio in retail businesses. Being a key performance indicator, the inventory turnover ratio can help you manage and grow your business effectively.

It can show liquidity

Do you intend to get a loan to manage your retail business? If yes, you should always calculate the inventory turnover ratio as it will how your business assets liquidity. This will be highly beneficial when making a loan application.

It helps in making business decisions

Making decisions that will benefit your business can be challenging as a business owner. While there are many indicators that you can use, the inventory turnover ratio is particularly peculiar to retail businesses. It shows the stock level and turnover rates which makes making business decisions an easy task. With the inventory turnover ratio, you can answer questions such as:

  • What and how many items do you have to order
  • What products do you need to put on sale?

Consequently, you can purchase merchandise, and sell products that your customers want. However, do well to combine it with other indicators for maximum business growth.

How To Improve Inventory Turnover Ratio

If on calculating your inventory turnover ratio you find it not in the specified range, then you need to know how to improve it. Below are some ways to improve the inventory turnover ratio for retail businesses.

Get a proper inventory management system

It is impossible to improve your inventory turnover ratio without using the right tools. Therefore, as a retail business owner, you need an effective POS (Point of Sale) inventory management system. These tools will allow you to track sales and inventory levels while generating full reports in real-time. A good POS inventory system will also allow you to report on all aspects of your business without the need for manual processing. Therefore, saving time and reducing costs.

Create ways to sell slow-moving inventory

Another way to improve your inventory turnover ratio is to ramp up sales of your inventory. The problem for many retail businesses that reduces the turnover ratio is slow-moving products. From the formula, the inventory turnover ratio is directly proportional to the number of goods you sell and inversely proportional to the average inventory on the ground. Therefore, stringent marketing efforts that can drive up sales of those slow-moving products that contribute to the average inventory will improve the ratio.

Proper forecasting

Many factors can influence the inventory turnover ratio. These include demand based on season, occasional products, and ongoing market trends. As a result, it is important you properly forecast orders and stock levels yearly, monthly, or quarterly as you like to calculate your inventory turnover ratio.

You can forecast by evaluating sales data as history will most likely repeat itself (depends on your business), observe the trends (for example, if you are dealing with footwear, note the trend on the types of sneakers that the majority of people are wearing and stock on it. You can also forecast based on the season (Christmas toys don’t sell in May).  On careful evaluation, incorporate the data into the plan and act on it!

Effective marketing

Your business sales are directly tied to your marketing ability. Consequently, effective marketing is a crucial tool to use when looking to improve your inventory turnover rates. With an effective marketing plan, you can sell items you have in stock that seem unsellable and reach more customers.

Also, marketing can be channeled towards getting new customers. With new customers, you can sell and improve your business and improve your inventory turnover rates.  There are many ways you improve your marketing. Below are some ways that have proven effective for many:

Social Media

Social media is a powerful tool, especially when you combine it with the use of ecommerce. You can easily leverage on platforms such as Facebook, Instagram, Twitter, and TikTok for your marketing needs.

Improve your website

User experience is an important factor you should consider also. If your retail business has a website, it is important to improve the website navigation. Consider factors such as loading speed, aesthetics, which improves navigation will affect the number of clicks you get.

Other factors to consider in marketing include email marketing, Loyalty programs, and paid advertising.

Ecommerce

Ecommerce is a powerful tool in the right hands. For retail businesses, you can leverage the advantages ecommerce brings. For example, with ecommerce, you can reach a new and large audience, have access to a different location, etc., to boost sales. There are also other intrinsic advantages of ecommerce based on the platforms you are using. For example, you can use the review system to build up credibility. Improve your sales using ecommerce and consequently improve your inventory turnover ratio.

Final Thoughts

For people running a retail business, your inventory turnover ratio can be an ideal tool to help you measure business growth. It can also be valuable in making business plans to boost sales. To make it easy, this article introduced inventory turnover, how to calculate it, the healthy inventory turnover ratio you could consider, and why it is important. By going through this article, no doubt you have a solid idea on how to improve your sales which banks on the need for a healthy inventory turnover ratio.

 

Table of contents

Sell online

With Ecwid Ecommerce, you can easily sell anywhere, to anyone — across the internet and around the world.

About the author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

Ecommerce that has your back

So simple to use – even my most technophobic clients can manage. Easy to install, quick to set up. Light years ahead of other shop plugins.
I’m so impressed I’ve recommended it to my website clients and am now using it for my own store along with four others for which I webmaster. Beautiful coding, excellent top-notch support, great documentation, fantastic how-to videos. Thank you so much Ecwid, you rock!
I’ve used Ecwid and I love the platform itself. Everything is so simplified it’s insane. I love how you have different options to choose shipping carriers, to be able to put in so many different variants. It’s a pretty open e-commerce gateway.
Easy to use, affordable (and a free option if starting off). Looks professional, many templates to select from. The App is my favorite feature as I can manage my store right from my phone. Highly recommended 👌👍
I like that Ecwid was easy to start and to use. Even for a person like me, without any technical background. Very well written help articles. And the support team is the best for my opinion.
For everything it has to offer, ECWID is incredibly easy to set up. Highly recommend! I did a lot of research and tried about 3 other competitors. Just try ECWID and you'll be online in no time.

Your ecommerce dreams start here

By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
Your Privacy

When you visit any website, it may store or retrieve information on your browser, mostly in the form of cookies. This information might be about you, your preferences or your device and is mostly used to make the site work as you expect it to. The information does not usually directly identify you, but it can give you a more personalized web experience. Because we respect your right to privacy, you can choose not to allow some types of cookies. Click on the different category headings to find out more and change our default settings. However, blocking some types of cookies may impact your experience of the site and the services we are able to offer. More information

More information

Strictly Necessary Cookies (Always active)
These cookies are necessary for the website to function and cannot be switched off in our systems. They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. You can set your browser to block or alert you about these cookies, but some parts of the site will not then work. These cookies do not store any personally identifiable information.
Targeting Cookies
These cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.
Functional Cookies
These cookies enable the website to provide enhanced functionality and personalisation. They may be set by us or by third-party providers whose services we have added to our pages. If you do not allow these cookies then some or all of these services may not function properly.
Performance Cookies
These cookies allow us to count visits and traffic sources, so we can measure and improve the performance of our site. They help us know which pages are the most and least popular and see how visitors move around the site. All information these cookies collect is aggregated and therefore anonymous. If you do not allow these cookies, we will not know when you have visited our site.