Stock turnover calculator: how many times a year does your stock sell?

The stock turnover formula

Stock turnover = cost of goods sold ÷ average stock. Both figures are at cost and without GST or VAT. Average stock is (stock at the start of the year + stock at the end) ÷ 2; use the end figure alone if that is all you have. The answer is how many times a year you sell through the stock you hold. Stock days = 365 ÷ stock turnover is the same figure as the number of days an item sits before it sells; how to calculate stock days works through it with a bike shop's Xero figures.

If you know your sales and gross margin but not your cost of goods sold, work it out first: cost of goods sold = sales × (1 − gross margin). At a 40% margin, £520,000 of sales is £312,000 at cost. Do not divide sales by stock: stock is at cost, so that inflates turnover by your markup (the margin and markup calculator shows the difference).

A worked example: a homewares shop

A homewares shop in Bristol sells £520,000 a year without VAT at a 40% gross margin. It held £58,000 of stock a year ago and £72,000 today, both at cost. Its suppliers deliver within three weeks, so the owner thinks six turns a year (about two months of stock) is plenty. (Made-up figures to show the arithmetic.)

	Amount
Cost of goods sold: £520,000 × (1 − 40%)	£312,000
Average stock: (£58,000 + £72,000) ÷ 2	£65,000
Stock turnover: £312,000 ÷ £65,000	4.8 times a year
Stock days: 365 ÷ 4.8	76 days
On today's stock alone: £312,000 ÷ £72,000	4.3 times, 84 days
Stock at 6 turns: £312,000 ÷ 6	£52,000
Cash freed getting there: £72,000 − £52,000	£20,000, once

Stock grew by £14,000 (24%) while sales did not, so today's 84 days is the figure to act on. That £14,000 left the bank without appearing as a cost anywhere on the Profit and Loss, one of the usual reasons a business shows profit in Xero but no cash in the bank. Getting to six turns frees £20,000, which the cash runway calculator turns into weeks of breathing room. Press "Load the worked example" above to see it in the calculator.

How to turn stock faster without losing sales

• Find the slow lines first. Xero's Inventory Item Summary shows the value held per tracked item. A handful of slow lines usually holds most of the extra stock; the best sellers rarely do.
• Order less, more often, on the lines a supplier can deliver quickly. The time to restock, not habit, should set how much you hold.
• Clear old stock at a discount rather than letting it sit at full cost. Cash now beats a full price that never comes, and stock that will not sell overstates both turnover and the Balance Sheet.
• Watch the margin when you clear. Discounting old stock lowers gross margin for a month or two. That is expected; a margin that keeps falling after the clear-out is not.

Stock is one of three places cash waits. The cash conversion cycle calculator adds what customers owe and what you owe suppliers, to show how many days your own cash funds each sale.

Getting the figures from Xero

1. Stock: Accounting › Reports › Balance Sheet, the inventory (or stock on hand) line under Current Assets, as at today and as at a year ago. How to read a balance sheet in Xero shows where it sits.
2. Cost of goods sold: the Profit and Loss for the last 12 months, the cost of sales section. Leave out workshop wages, freight or subcontractors if your file puts them there; cost of goods sold in Xero explains what belongs in it.
3. Check the stock figure is current. If you do not track inventory items in Xero, purchases go straight to cost of sales and the stock line only moves when your accountant posts a stocktake. Mid-year, count the stock and value it at cost instead.

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