Imagine you’re running a small business and business is good — like, items flying off the shelves good. You want to keep hot items in stock so you don’t miss out on any sales. How can you do that without a crystal ball telling you how much new inventory to order, and when?

The answer lies in a key metric that measures how often you’re selling through and restocking — or turning over — your inventory. Read on to see how it works, how to use this metric, and why it’s so effective.

What you’ll learn:

• What is sales turnover?
• Why calculating sales turnover is important
• How to calculate sales turnover
• What is a good turnover rate?
• Sales turnover example

What is sales turnover?

Sales turnover — sometimes called sales turnover ratio — is the number of times a business sells and replaces its entire inventory during a given period. While some companies choose to measure sales turnover by counting units of inventory sold, most track revenue from those sales and use that in the calculations. The metric can also be used by businesses that sell services, not physical products.

We’ll walk through how to calculate sales turnover in a moment. First, let’s look at why it matters.

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Why calculating sales turnover is important

Calculating this metric is important for a few reasons. For starters, it’s helpful for inventory management. Knowing your sales turnover can help your business maintain enough inventory to meet customer demand without overspending and winding up with unsold items you already paid for. It’s also a useful metric for predicting when you’ll need to restock inventory and how many items to buy or produce. In the case of a services business, turnover can help inform staffing decisions. Instead of restocking inventory, a services business with high turnover would staff up to meet increased demand.

Furthermore, sales turnover provides insights into overall business health by revealing trends in sales performance over time. Breaking down your sales turnover helps you identify patterns, predict future sales, and make informed decisions about product development, marketing, and cash flow, along with other resource allocation. A consistent increase in sales turnover indicates healthy growth, while fluctuations might prompt a review of business strategies and market positioning.

You can dive deeper into your company’s sales data with Salesforce Sales Cloud. Get complete visibility into your sales pipeline, forecasting, and rep performance — all on a single, customizable platform — enabling your business to make data-driven decisions that drive success.

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How to calculate sales turnover

Start by gathering the data you’ll need to work through the formula:

• Starting inventory: The amount of inventory at the beginning of your selected time period.
• Extra inventory expenses: Expenses incurred during purchasing, storing, and selling your inventory. These might include shipping costs, storage costs, and taxes or fees paid on inventory purchases.
• Ending inventory: The amount of inventory left in stock at the end of your selected time period.
• Cost of goods sold (COGS): The total cost of producing the goods sold, including materials, labor, and other expenses.
• Average inventory: An estimation of the value of your inventory during the selected time period.

Now, let’s walk through the steps to calculate sales turnover.

1. Define the time period: Choose the time frame for which you want to calculate the turnover ratio. This could be monthly, quarterly, or annually.
2. Calculate the cost of goods sold (COGS): Next, determine the cost of the items you sold. To calculate COGS, first add up your initial and additional inventory expenses. Then, subtract the value of your ending inventory from that sum. The result is your COGS.
3. Identify average inventory: Sum up the cost of your starting and ending inventory. Divide the sum by two.
4. Calculate turnover ratio: Divide your COGS by your average inventory. The result is your sales turnover.

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What is a good turnover rate?

Generally speaking, the higher your number, the better your rate. But if your sales turnover rate is too high, it may signal that you aren’t keeping tabs on inventory. Sell-outs can lead to stock shortages and missed sales opportunities. To determine a good sales turnover rate, you’ll want to compare your numbers to competitors in your industry. This helps you see trends, patterns, and areas for improvement. Above all, your sales turnover rate should be sustainable. You need to find the sweet spot between inventory levels and customer demand to generate a profit.

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Sales turnover example

Widget Co. wants to estimate annual sales turnover to find out how many widgets they should plan to produce next year. Widget Co.’s team calculated that the company kicked off last year with $400,000 in starting inventory, had $100,000 of extra inventory expenses, and wound up with $40,000 of ending inventory.

Step 1: Time Period = One year.

Step 2: COGS (Starting inventory + Extra inventory expenses) – Ending inventory

($400,000 + $100,000) – $40,000 = $460,000

COGS = $460,000

Step 3: Average Inventory = (Starting inventory + Ending inventory) / 2

($400,000 + $40,000) / 2

$440,000 / 2 = $220,000

Average inventory = $220,000

Step 4: Sales Turnover = COGS / Average inventory

$460,000 / $220,000 = 2.1

Sales turnover = 2.1

Widget Co’s sales turnover is 2.1. This means that the company sold through its average inventory 2.1 times in that one-year period.

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Capitalize on sales opportunities with revenue intelligence

When business is good, you want to make the most of it. Hot items flying off your shelves is a good thing. Having more inventory on hand so you can keep selling and meeting that demand is even better. Calculating your turnover ratio can help ensure you know when to restock inventory and how much to order or produce. That way, you don’t miss out on sales opportunities, and you don’t get stuck with unsold stock. It’s easy to make the calculation using business data you already have, and Salesforce’s revenue intelligence can further enhance your ability to analyze, predict, and improve sales outcomes.