The bestseller made 35% of revenue. It turned 1.5 times a year.
A packaging distributor celebrated one carton size as its bestseller and treated it as the growth engine. Revenue said so. Nobody had put revenue next to how long the cash stayed in it.
Inventory turnover is that second number. It is usually taught as an efficiency ratio. It is a cash number: how many times a year the money put into inventory comes back.
How to calculate inventory turnover
Inventory turnover = cost of goods sold / average inventory value
Cost of goods sold is the total for the period, usually a year. Average inventory value is the opening and closing inventory added together and divided by 2.
The same figure in days is days inventory outstanding: 365 divided by turnover. A product that turns 1.5 times a year holds its cash for about 243 days.
What was found
For the distributor, the product that earned 35% of revenue was holding its cash for most of a year. Revenue contribution and capital consumption had never been looked at together. The bestseller was consuming working capital faster than its margin could justify.
"The metric looked like a strength. It was the single biggest drag on our working capital and we had been doubling down on it."
What slow turnover costs, and what too-fast turnover costs
Faster turnover brings:
- Lower holding costs. Less storage, insurance and risk of obsolescence.
- Better cash flow. Capital is tied up for a shorter time and is free for the rest of the business.
- Lower risk. Less stock to be caught with when demand, supply or the economy shifts.
Pushed too far, it costs something else:
- Stockouts. Lost sales and customers who remember.
- Weaker supplier terms. Discounts for larger, steadier orders are missed.
- More orders. Higher administration and freight on many small orders.
- Lost economies of scale in purchasing or production, and strain where lead times are long or sources are few.
So the right number is not "as high as possible." It is the one where the cash released is worth more than the cost of running closer to empty.
The fix: find the right turnover for each line
One company-wide ratio hides the answer. The figure has to be set by product line, from 3 things:
- The industry and the demand. Seasonality and trend in the market each line sells into.
- The supply chain. Supplier lead times and reliability. Shorter lead times allow higher turnover.
- The holding cost. Storage, insurance and obsolescence, calculated and not assumed.
Then the steps:
- Read the history. Sales, turnover and holding cost by line, side by side with revenue and margin.
- Compare. What is typical for businesses like this one.
- Model the scenarios. What each turnover figure does to cash and to profit before anything is changed.
- Test and monitor. Apply it, watch it, adjust as conditions change.
Sometimes the right call is higher turnover at a slightly lower margin, for the cash. Sometimes it is profit per sale at a slower turn. The point is that it is decided, with both numbers on the table.
The result
The distributor moved production and marketing toward the faster-turning lines, and judged inventory by turnover and not by revenue share. Storage cost fell by 12%, and capital that had sat in one place for years began to move.
To run the same check on your own lines, the free bestseller test takes revenue, margin and inventory by line and shows the cash each one holds. It is the difference between quoting a turnover ratio and being able to defend it.
Is this your number?
If sales are fine and the cash never is, this is the work: where the money is stuck, and which decisions put it there.