Inventory turns: how much cash is sitting on your shelves

Inventory is the only asset on your balance sheet that can bankrupt you while looking like wealth. It represents cash you have already handed over, sitting in a form you cannot spend, and it will keep sitting there until someone buys it.

Turns measure how fast that happens: cost of goods sold / average inventory. Six turns means you sell through your stock six times a year, so on average a dollar of inventory comes back as cash in about two months.

Turns, translated into days

Divide 365 by your turns and you get days of inventory on hand, which is the version that actually connects to cash. Four turns is 91 days; eight turns is 46. That difference is a month and a half of working capital on every dollar of stock you carry.

That last figure is the one to internalise. Slowing from 5.8 turns to 4.2 on the same volume did not cost anything on the income statement. It quietly consumed $94,000 of cash, which is why a business can be as profitable as last year and somehow have no money.

The average hides everything

A blended turns number across your whole catalogue is nearly useless, because it is an average of items behaving completely differently. The interesting analysis is by SKU or category.

Nothing about the core business is wrong. There is $174,000 of dead stock distorting the whole picture, and no amount of improving the healthy categories will fix a number that is being dragged down by inventory nobody is buying.

Dead stock is a decision you keep deferring

The hardest part of inventory management is psychological. You paid $174,000 for that stock, so selling it at 40% off feels like accepting a loss. But the loss already happened — it happened when it stopped selling. The only remaining question is how much cash you can recover and how fast.

Meanwhile it costs you every month it stays: storage, insurance, obsolescence, and the opportunity cost of cash you could have put into the core line that turns nine times a year. Nine turns at a 35% margin earns far more than holding out for full price on something that has not moved in a year.

What good looks like

Turns vary enormously by industry, so compare yourself to your own trend first and to peers second. Grocery runs very high turns on thin margins; jewellery runs very low turns on fat ones. Both work. What does not work is turns falling while margins stay flat — that is inventory creeping up without any compensating benefit.

Two habits keep it honest: review turns by category quarterly rather than annually, and set a rule in advance for what happens to anything that has not moved in a given period. Deciding the rule when you are calm is far easier than deciding case by case when each item feels like a personal judgment.