Introduction to this document

Stock turnover calculator

Many businesses believe that they consistently carry more stock than is needed. As holding stock means tying up cash, then ideally you would want to keep stock at minimum levels to meet sales forecasts and keep production running smoothly. So how can you help the board make sense of how well stock is being handled?

Stock turnover kpi

A classic operating efficiency key performance indicator (KPI), based on readily available financial information, is “stock turnover”; this shows how fast stock is moving through the business. A high turnover could indicate a healthy and liquid inventory with lower demands on cash flow, but it could also mean stock shortages. A low turnover suggests overstocking although that could just be down to seasonal demand. These different interpretations show that calculating the average from only two days in a period (beginning and end of the period) is highly dangerous if they are not representative days.

Our Stock Turnover Calculator uses a moving average calculation to avoid this potential “unrepresentative” issue.

Use more than one kpi

Be wary of suggesting a change to the company’s stock policy purely based on stock turnover KPIs. If the board sees a stock turnover KPI which suggests inventory is rapidly piling up beyond what’s needed, the typical reaction is to enforce a clampdown on new purchases. However, this can create material shortages which can cause missed shipments, depressed revenue and customer service but increased stock and costs. Calculate additional KPIs for stock management, such as:

  • Stock-outs in period. Stock-outs indicate where a demand can’t be met due to the absence of the required stock - monitoring the number of stock-outs in a period will tell you if you have the right mix of stock type and quantity.
  • Service level. Service levels can be calculated per individual customer and are calculated by reviewing the number of times an item has been issued divided by the number of times demanded - a low service level will indicate that customers invariably have to wait for parts and that stock held could be of the wrong type.
  • Lead time. Lead time is the length of time it takes to obtain stock from suppliers - long lead times can result in holding excess stock.
  • Stock cover. Stock cover is the length of time that inventory will last if current usage continues - it helps appraise the impact of changes in lead time or the potential for running out of stock.

Adding these as separate sheets to your stock turnover calculator workbook will enable the board to get a handle on the stock level position.