Inventory Turnover Ratio and Inventory Days: Formulas, Benchmarks and Examples

The inventory turnover ratio is a KPI that indicates how many times a business replaces (or sells) its average inventory in a given period. On the other hand, inventory days show how long stock remains unsold. 

Both these metrics help Indian businesses identify slow-moving stock, plan purchases well and reduce situations of working capital blockage in inventory.

 What Is the Inventory Turnover Ratio?

The inventory turnover ratio measures how efficiently a business converts inventory into sales.

It is also known as:

• Inventory turn
• Stock turn
• Stock turnover ratio
• Inventory turnover rate

The ratio is useful for retailers, manufacturers, wholesalers, distributors and ecommerce businesses. 

Simplify Your Business Operations

Designed to give you speed, control, and accuracy in daily accounting tasks.

• Save time with automated accounting workflows
• Get 35+ detailed business reports easily
• Access your business anytime, anywhere

Unlock the Munim Advantage

What Are Inventory Days?

Inventory days measure the average number of days stock remains with a business before being sold or used.

It is also called:

• Days sales in inventory
• DSI
• Days inventory outstanding
• Inventory holding period

For example, 60 inventory days means the business holds stock for approximately 60 days before selling it.

Inventory Turnover Ratio vs Inventory Days

Both metrics measure the same stock movement. When inventory turnover increases, inventory days generally decrease.

Inventory Turnover Ratio Formula

The standard formula is:

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory

For example:

• Cost of goods sold: ₹90 lakh
• Average inventory: ₹15 lakh

Inventory turnover ratio = ₹90 lakh ÷ ₹15 lakh = 6 times

The business sold inventory equal to its average stock six times during the year.

How to Calculate Average Inventory

The basic formula is:

Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2

Example:

• Opening inventory: ₹12 lakh
• Closing inventory: ₹18 lakh

Average inventory = (₹12 lakh + ₹18 lakh) ÷ 2 = ₹15 lakh

When Should Monthly Average Inventory Be Used?

Monthly average inventory gives a more accurate result when stock levels change significantly during the year.

It is useful for:

• Seasonal retailers
• Ecommerce businesses
• Textile and apparel businesses
• Festival product sellers
• Agricultural businesses
• Companies building stock before peak demand

The calculation is:

Average Inventory = Total of Monthly Inventory Balances ÷ Number of Balances

A business using a periodic inventory system may need to complete a physical stock count before calculating closing inventory.

How to Calculate Cost of Goods Sold

For a trading business:

COGS = Opening Inventory + Net Purchases + Direct Costs − Closing Inventory

Net purchases are calculated after deducting purchase returns.

Direct costs may include:

• Freight inward
• Loading charges
• Transport costs
• Import duties
• Non recoverable taxes
• Other costs required to bring goods to their present location

COGS Example

COGS = ₹12,00,000 + ₹88,00,000 + ₹2,00,000 − ₹4,00,000 − ₹18,00,000

COGS = ₹80,00,000

For manufacturers, COGS may also include direct labour, production overheads and changes in raw materials, work in progress and finished goods.

Inventory Days Formula

The formula is:

Inventory Days = Average Inventory ÷ COGS × Number of Days

For an annual calculation:

Inventory Days = Average Inventory ÷ COGS × 365

It can also be calculated as:

Inventory Days = 365 ÷ Inventory Turnover Ratio

If the inventory turnover ratio is 6:

Inventory days = 365 ÷ 6 = 60.83 days

The business holds inventory for approximately 61 days.

Days to Use for Different Periods

The COGS and average inventory figures must relate to the same period.

Indicative Inventory Turnover Benchmarks

The following figures are broad reference ranges. They are not official Indian benchmarks.

Indian businesses should adjust these ranges for local demand, import lead times, supplier reliability, margins and credit terms.

How Can a Business Improve Inventory Turnover?

1. Classify Inventory

Products should be grouped as:

• Fast moving
• Medium moving
• Slow moving
• Non moving
• Seasonal
• High value
• Expiry sensitive

This helps the business focus on products requiring immediate action.

2. Use ABC Analysis

ABC analysis groups inventory according to annual consumption value.

ABC analysis and other inventory management techniques help businesses prioritise stock.

3. Set Reorder Points

The basic formula is:

Reorder Point = Average Daily Usage × Supplier Lead Time + Safety Stock

The reorder point should consider demand changes, delivery delays and minimum purchase quantities.

4. Review Purchase Quantities

Bulk purchases may offer discounts but can increase:

• Storage costs
• Interest costs
• Damage risk
• Expiry risk
• Obsolescence
• Capital blockage

The purchase price saving should be compared with the total holding cost.

5. Improve Demand Forecasting

Sales data should be reviewed by:

• Product
• Month
• Customer type
• Location
• Sales channel
• Season
• Promotion
• Return rate

Businesses with seasonal demand should compare the same period across multiple years.

6. Clear Slow Moving Stock

Possible actions include:

• Discounts
• Product bundles
• Supplier returns
• Transfers to another location
• Alternative use in production
• Responsible disposal
• Inventory write down

The GST and accounting treatment should be checked before disposing of or writing off stock.

7. Improve Supplier Coordination

Businesses can negotiate:

• Smaller order quantities
• More frequent deliveries
• Flexible purchase schedules
• Better credit terms
• Supplier return arrangements
• Faster delivery timelines

8. Maintain Accurate Stock Records

Every purchase, sale, return and adjustment should be recorded promptly.

Businesses can use accounting software for inventory tracking to keep billing and stock records connected.

Inventory Metrics Businesses Should Track

These metrics should be reviewed monthly and compared with previous periods.

Frequently Asked Questions

What does an inventory turnover ratio of 5 mean?

It means a business sold inventory five times the average stock during the period. 

Is a higher inventory turnover ratio always better?

Not necessarily. If the ratio is high, it could mean strong sales; however, an unusually high ratio can point to insufficient stocks. 

Are inventory days and days sales in inventory the same?

Yes. Inventory days, days sales in inventory and days inventory outstanding generally refer to the same metric.

Should sales or COGS be used?

COGS should normally be used because both COGS and inventory are measured in terms of cost. If COGS is not available, sales should only be used as an approximation.

Can inventory turnover be calculated monthly?

Yes. Monthly COGS should be divided by average inventory for the same month. Actual days in that month should be used for calculating inventory days.

What is a good number of inventory days?

There is no universal number. The appropriate holding period will vary based on the industry, product type, and supplier and customer lead time.

Should manufacturers calculate separate ratios?

Yes. Manufacturers can calculate separate ratios for raw material, work in progress and finished goods, which can help them pinpoint the delays.

How does slow moving inventory affect the ratio?

Slow-moving inventory will inflate average stock levels without recording COGS. This reduces the inventory turnover and increases the inventory days.

Can the inventory turnover ratio be negative?

A meaningful ratio is normally not negative. A negative result usually indicates incorrect COGS, inventory adjustments or accounting entries.

Does low inventory turnover mean the business is making a loss?

Not necessarily. It indicates slow stock turnover, not profitability. But as storage costs and obsolescence increase over time, profits can decrease.