A business buys stock, holds it, sells it and buys again. This page follows that repeating loop and shows how the stock level rises and falls, and how quickly the whole cycle turns over.
Every business that sells physical goods keeps some stock on hand. The inventory turnover cycle is the round trip that stock makes: it is bought, received into storage, sold to a customer, and then bought again. The same loop repeats for as long as the business keeps selling.
What makes the cycle worth understanding is the money inside it. Goods sitting on a shelf have already been paid for, so every item in storage is cash that cannot be spent elsewhere. The faster the loop turns, the less cash is parked in the warehouse.
Each delivery lifts the stock level up; each sale pulls it down. Between orders the level drifts steadily lower until it reaches a reorder point and a new delivery arrives. Plotted over time, those rises and falls form a repeating sawtooth — the shape on the right of the diagram.
Turnover turns that shape into a single number: inventory turnover = cost of goods sold ÷ average inventory. A high number means the stock is cycling quickly; a low number means goods are lingering.
The cycle starts with an order to a supplier. The business commits cash to buy goods it expects to sell, and that cash leaves the bank as stock is paid for.
The goods arrive and are stored. This is the moment the stock level jumps up. The stock sits in a warehouse or on a shelf, waiting to be sold, holding cash and space until it moves.
As customers buy, the stock level falls steadily. Each sale turns stored goods back into cash — usually at a higher price than they cost, which is where the business earns its margin.
When the stock drops to a set reorder point, a new order goes out. The point is chosen so fresh goods arrive before the shelf runs empty, avoiding a stockout.
The loop repeats, order after order. Turnover is the count of how many times the stock is replaced in a period: cost of goods sold divided by average inventory. A faster, well-matched cycle keeps cash working instead of waiting in the warehouse.
A measure of how many times a business sells and replaces its stock in a period. A high number means the stock moves through the business quickly.
Purchase, receive, sell and reorder, over and over. Stock falls as goods are sold, then jumps back up when a new order arrives.
The faster stock turns over, the less cash sits idle on shelves. The same money can fund more sales instead of waiting in the warehouse.
The stock level that triggers a new order. It is set so fresh goods arrive before the shelf runs empty.
Inventory turnover = cost of goods sold divided by average inventory over the same period.
Not always. A cycle faster than real demand leads to empty shelves and lost sales; the goal is a cycle that matches demand.