As someone who runs an e-commerce store, you'll know that inventory management is one of the biggest challenges a retail business owner can face. Predicting just the right amount of inventory to meet customer demands without going into excess is key to business optimization — making inventory turnover ratio one of the most important metrics to pay attention to.

Inventory turnover ratio is also an essential part of your financial statement analysis, as it is used to determine whether or not the businesses is running efficiently. Maintaining a good inventory turnover ratio will minimize dead stock, free up cash flow, and reduce overheads like holding and storage costs, which is why many retailers continuously strive to improve inventory turnover.

## How to calculate inventory turnover

Inventory turnover represents how many times your average inventory has been sold or “turned over” within a specified time period. Usual accounting practice is to calculate turnover on an annual basis. However, you can also calculate turnover more regularly (for example, monthly or quarterly) to identify seasonal trends in your business.

The inventory turnover formula is:

Inventory Turnover = Cost of Goods Sold/Average Inventory
Average Inventory = (Beginning Inventory + Ending Inventory)/2

As an example, let’s assume you’re calculating your annual turnover for 2020.

At the beginning of the fiscal year, you had \$20,000 worth of inventory. By the end, you had \$18,000. This makes your Average Inventory for the time period \$19,000.

Your net sales (or Cost of Goods Sold) in 2020 was \$50,000.

This makes your Inventory Turnover for 2020 = \$50,000 / \$19,000 = 2.63

In other words, you sold 2.63 times the value of your average inventory within the fiscal year.

## 10 strategies for improving inventory turnover

Based on the inventory turnover formula, there are two main things you can do to improve turnover:

1. Improve net sales.
2. Reduce average inventory.

### 1. Leverage past data

Having a good inventory turnover ratio is about balancing supply with demand, which requires insight into customer behavior. And you don’t need a highly sophisticated system with predictive analytics to achieve this – we’ve created a forecasting spreadsheet template to help you estimate future sales and better manage restocking for improved turnover.

### 2. Automate

Save precious time on manual calculations with tons of inventory management apps that integrate seamlessly into your e-commerce platform and simplify things for you. Track sales across all your digital channels, forecast future demand, automate restocking, monitor your inventory in real-time, and make better strategic decisions for your business.

### 3. Monitor trends

Know what’s trending in your market to understand customer demand and respond accordingly. Staying up-to-date on e-commerce trends, whether it’s festive seasons like Valentine’s Day or Christmas, popular sales events like Singles’ Day or Black Friday Cyber Monday, or retail trends like subscription boxes, can help you adapt prices and inventory for better sales and turnover.

### 4. Use smart pricing

If you’re selling across different regions, having a single pricing strategy for all markets may not deliver the best results. Instead, consider multiple pricing strategies based on factors such as seasonal events, shipping costs, and purchase quantities.

### 5. Employ omnichannel marketing

Having a multi-channel approach to your e-commerce business is essential in today's digital-first market. This means making sure you're on social media, following SEO best practices, employing email marketing, investing in display ads, and more. You can streamline marketing for your e-commerce business with Shopify and create integrated omnichannel marketing campaigns with no experience needed to boost sales and visibility.

### 6. Improve shipping

As an online retailer, fast and reliable shipping is critical to your business success – 98.1% of customer say that quality of delivery impacts their brand loyalty, and 84% say they are unlikely to return to a brand after a poor delivery experience. Ensuring reliable shipping for your online store is key to improving customer experiences for increased sales and turnover.

### 7. Test new products in small batches

Expanding your product range is an excellent strategy for attracting new and return customers with fresh stocks and designs. But before committing to a bulk order, it’s a good idea to do a batch test on a range of new products first to see how your customers respond before doubling down on the ones that prove successful. It’s better to order smaller quantities and pay more per unit first than bring in too much inventory upfront without testing your market.

### 8. Explore no-inventory-required products

Encouraging customers to preorder is one of the best ways to increase turnover by locking in sales and ensuring that your inventory isn't too overstocked. Also, explore made-to-order products that can be produced on-demand (Printful or Printify) and dispatched quickly to your warehouse or even directly to your customers.

### 9. Consider dropshipping

Dropshipping is a method of retail fulfillment that doesn't require you to keep inventory on hand. Instead, you purchase the product from a supplier who then ships it directly to your customer. Dropshipping is a great way to decrease your upfront inventory costs and improve turnover.

### 10. Improve your online store

Want to improve sales? Make sure your e-commerce store is well-designed. Design can improve sales by lifting your brand credibility, ensuring that your products are well organized and searchable, and ensuring that your site is mobile-friendly – more than half of shoppers in Singapore shop on their mobile.

## Common questions about inventory turnover

### What does high inventory turnover mean in financial statement analysis?

Inventory turnover indicates how quickly you’re able to move your product. High inventory turnover indicates that you're moving product quickly while keeping inventory low. This generally indicates better cash flow and business profitability. However, it's also vital to ensure your turnover doesn't get too high, which could mean that you aren’t holding enough merchandise to meet customer demands and that you may be losing out on additional sales. Low inventory turnover signals insufficient sales or that you're holding too much "stagnant" inventory – inventory is tied-up capital and, depending on the product, the longer you hold inventory, the higher the risk that its value will drop over time. This could harm your profit margins.

### What is considered a good inventory turnover ratio?

For e-commerce, an ideal inventory turnover ratio is usually between 4 to 6.

### Why is it important to have a good inventory turnover ratio?

A good inventory turnover ration ensures you have enough cash flow without compromising on sales. It also:
Reduces waste:
Products with expiry dates (like food or cosmetics) or seasonal products that will become irrelevant after a period of time eventually become dead stock - inventory that can no longer be sold. Holding too much dead stock is a waste of resources and manpower.
Saves cost:
Inventory takes up storage space, and warehousing is often a variable cost. Reducing your inventory or increasing your turnover ensures that this is minimized, contributing to healthier profit margins.
Improves cash flow:
Inventory represents tied-up capital, making inventory turnover closely related to cash flow. Improving turnover, whether by increasing sales or reducing stock, can ease cash flow for better operational and financial flexibility.