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Calculating your stock turnover
Stock control: the basics
One commonly used measure of stock performance is the stock turnover rate. This rate indicates the number of times the stock in a business has 'turned over', or been replaced, in a year.
Stock turnover rate is considered to be a measure of sales performance; usually the higher the stock turnover rate, the better your stock/business is performing.
The lower the rate, the longer the stock is taking to turn over. Funds are invested in stock for longer periods, which, in turn, has an adverse effect on cash flow.
To calculate your stock turnover, you first need to work out your average stock value by looking at the value of your opening stock and the value of your closing stock.
Learn about trading stock rules for small business, including how you can estimate the value of your stock.
Use the following interactive calculator to help you work out your stock turnover rate. Once you have read and understood the examples, you can type the numbers that are relevant to your business into the stock turnover rate calculator to see your rate.
On a cost of sales basis, the average stock turnover rate for manufacturers may range from 4 to 21 times. Various associations and professional organisations publish these types of values periodically, and they can be a useful guide for matching up your own business performance.
Using your stock turnover rate
Reviewing your stock choices
Your stock turnover rate can help you work out how effectively you are managing your stock. When you review your stock turnover, look for trends such as constantly moving items or items that rarely sell. You can then stop ordering the items that don't move, which will reduce your costs or make room for new items that might sell better.
Items that have a really high stock turnover rate are essentially your best sellers. You could consider ordering more of these items and driving further sales through marketing.
Calculating your minimum stock levels
You can also use your stock turnover rate to calculate the minimum levels of stock you need. Your minimum stock levels, and the types of incidents that could affect them, should be addressed in your business continuity plan.
Benchmarking your business
You can compare your stock turnover rate to other similar businesses when benchmarking your business. This can help you work out how well you are performing and what areas you might need to improve on.
Valuing your business
Your stock turnover rate can help you value your business, which can be useful if you are thinking of selling.