Quick answer
Stock turnover measures how many times a year your inventory sells and is replaced: cost of goods sold divided by average stock held at cost. Lenders use it, often alongside days of stock on hand, to judge how quickly stock turns back into cash, whether you're over-stocked and how much your inventory might be worth as security. A steady or improving figure, explained in context, strengthens a stock or working capital application.
Key points
- Stock turnover = cost of goods sold divided by average stock at cost.
- Days of stock on hand = 365 divided by stock turnover; lenders often think in days.
- Compare your figure with your own history and your industry, not with a universal target.
- A slow figure can be fine if there's a reason, such as a planned seasonal build, as long as you explain it.
- Clean stock records make your figure credible, and credible numbers speed up approvals.
Stock turnover is how many times a year your inventory sells and is replaced: cost of goods sold divided by your average stock at cost. Lenders use it, often as “days of stock on hand”, to judge how fast your stock turns into cash, whether you’re over-stocked, and what your inventory might be worth as security. A steady figure, explained in context, helps any stock-related application.
It’s one of those numbers most owners have a feel for but have never actually worked out. Ten minutes with your accounts fixes that, and it’s well worth doing before you ask anyone to lend against your stock.
How do you calculate stock turnover?
You need two figures, both usually in your profit and loss statement and balance sheet:
- Cost of goods sold (COGS) for the year. This is roughly opening stock, plus purchases, minus closing stock.
- Average stock at cost. Add your opening and closing stock values and divide by two. If you have monthly stock figures, averaging all twelve gives a truer picture.
Then:
- Stock turnover = COGS ÷ average stock
- Days of stock on hand = 365 ÷ stock turnover
Here’s how that looks for three made-up businesses:
| Business (illustrative) | COGS for the year | Average stock at cost | Stock turnover | Days of stock on hand |
|---|---|---|---|---|
| Independent grocer | $1.2m | $100k | 12 times | about 30 days |
| Hardware and garden store | $900k | $300k | 3 times | about 122 days |
| Jewellery store | $400k | $200k | 2 times | about 183 days |
None of these is “good” or “bad” on its own. A grocer holding 120 days of stock would be in trouble. A jeweller turning stock every month would be unusual. The figure only means something in context.
Why do lenders care about stock turnover?
When you borrow against stock, or borrow to buy more of it, a lender is really asking how quickly that stock becomes cash, because cash is what repays the loan. Stock turnover answers that in one number.
Lenders typically read it in three ways:
- Liquidity. Faster-turning stock converts to cash sooner, which supports repayments and makes the stock more valuable as security for inventory finance.
- Buying discipline. A figure that’s falling year on year can suggest over-ordering, dead stock or slowing sales.
- Consistency with your other numbers. Lenders compare your stock levels with your sales and bank statements. If stock keeps climbing while sales stay flat, they’ll ask why.
The ATO looks at related numbers too. Its benchmarking methodology notes that cost of sales is considered an accurate determinant of sales for retailers, and that benchmark ratios are calculated from labels on tax returns and activity statements. Our guide to ATO benchmarks and business loans explains how lenders use similar comparisons.
What does your figure say about you?
It’s less about the number and more about the trend and the explanation:
Steady or improving turnover tells a lender your buying matches your selling. That’s the easiest story to fund.
Falling turnover with a reason is usually fine. Planned stock builds before Christmas or end of financial year, a new product range, a bulk buy to beat a supplier price rise, or a new store being stocked all temporarily push turnover down.
Falling turnover with no reason invites questions. The lender may suspect slow or obsolete stock, and may give your inventory less value as security. Our guide to slow-moving stock covers how to clear it.
Very high turnover with frequent stock-outs is a different signal. It can mean you’re under-stocked and losing sales, which is a good case for a business line of credit or working capital to carry more of your best sellers.
If you already know your figure and want to see what it could support, start a 60-second enquiry and include it in the notes. It helps the person who calls you get straight to the point.
What do lenders read alongside stock turnover?
Stock turnover rarely travels alone. A lender usually puts it next to two other timing measures, because together they show how long your cash is tied up from the day you pay a supplier to the day a customer pays you:
- Debtor days. How long customers take to pay you, on average. A wholesaler with 61 days of stock and 45 days of debtors has cash tied up for well over three months on every sale.
- Creditor days. How long you take to pay your suppliers. Generous supplier terms offset some of the time stock sits on your shelves.
Add stock days to debtor days, take away creditor days, and you have a rough “cash cycle”. The longer it is, the more working capital the business needs simply to keep trading as it grows. That’s often the real reason a profitable stock-heavy business feels permanently short of cash, and it’s the number a lender is quietly working out when it reads your stock, debtor and creditor figures together.
It also points to where funding fits. If the cycle is long because customers pay slowly, invoice-based funding may help. If it’s long because stock sits for months, the fix is buying and clearing, with funding to carry peaks.
How do you make your stock figures credible?
A turnover figure is only as good as the stock numbers behind it. Lenders trust figures that come from records they can follow.
- Do regular stocktakes, or at least cycle counts of your biggest lines. The ATO’s general trading stock rules require a stocktake and opening and closing values for businesses using those rules.
- Know which tax rules you use. If your business uses the simplified trading stock rules, you may not need a formal stocktake for tax, but the ATO still expects a reasonable estimate you can explain from your records. A lender will want the same.
- Value stock at cost, consistently. Don’t mix retail and cost values in the same report.
- Run an ageing report. It shows the lender how much of your stock is fresh and how much has sat for months.
- Reconcile your inventory system with your accounts. A big gap between the two is the first thing a careful lender will notice.
Illustrative example: a pet supplies wholesaler
Illustrative only. A pet supplies wholesaler applies for a stock facility ahead of the summer peak. Its accounts show COGS of $2.4m and average stock of $400k, so stock turnover is six times a year, or about 61 days of stock on hand. The year before, it turned stock eight times.
On its own, the drop could worry a lender. But the owner explains that the business took on a new premium food range eight months ago, which required a full opening stock order, and that the range is now reordering every five weeks. She attaches an ageing report showing almost no stock older than 120 days and monthly sales figures for the new range. The lender sees a planned dip with a clear recovery, not a buying problem, and assesses the application on that basis.
How can you improve stock turnover before you apply?
You won’t transform a year’s figure in a month, but you can improve the picture:
- Clear dead stock through returns, bundles or clearance, so it’s not dragging the average.
- Reorder little and often on core lines where suppliers allow.
- Review minimum order quantities with suppliers; some will split pallets for regular customers.
- Drop lines that don’t earn their space, especially those with low margins and slow sales.
- Use monthly figures if your year-end stock was unusually high because of a planned build. A lender will appreciate the fuller picture.
The industry finder shows the common concerns lenders have in stock-heavy industries, so you can address them before they’re asked.
Know your number? Put it to work
If you’ve just worked out your stock turnover, you understand your business better than most applicants, and you’re ready for a sharper conversation about funding. Whether you need working capital to carry more of your best sellers or a facility for a seasonal build, the right option starts with numbers like these.
The form takes about a minute, and there’s no credit check when you first enquire. We won’t pass your details to every lender in town, and you won’t be chased by people you’ve never spoken to. One of our team reads what you send, including your stock story, and gives you a call. Answer the form accurately, with your real turnover and the amount you need, so we can match you to the right option first time.
Frequently asked questions
What's a good stock turnover figure?
There isn't one number for everyone. A grocer may turn stock many times a year, while a jeweller or machinery dealer turns it a few times. Lenders compare your figure with similar businesses and with your own past years.
Should I use sales or cost of goods sold to calculate it?
Cost of goods sold is better, because your stock is recorded at cost. Using sales inflates the figure by your margin. If you only have sales, say so, so the lender can compare like with like.
Do lenders actually calculate stock turnover?
Many do, especially for stock-heavy businesses or inventory finance. Others look at the same thing through days of stock on hand, ageing reports or by comparing your stock levels with your sales.
What if my stock turnover dropped this year?
Explain it. A planned stock build before a peak, a new product range or a supplier bulk deal are all reasonable. An unexplained drop invites questions about dead stock or slowing sales.
Do I need a stocktake to calculate stock turnover?
You need a reliable stock figure. A recent stocktake is best. If you use the ATO's simplified trading stock rules and don't do a formal stocktake for tax, a lender will still want a credible stock report from your inventory system.