What Is Inventory Turnover?
By BRIX Editorial Team · Updated
Inventory turnover is how many times a business uses up and replaces its average inventory over a period, usually a year. Calculate it by dividing the cost of materials used by the average value of inventory on hand. For a trades business, higher turnover means less cash sitting on shelves and trucks; too high can mean frequent stock-outs.
Key takeaways
- Inventory turnover = cost of materials used ÷ average inventory value, both at cost.
- Days on hand = 365 ÷ turnover. It tells you how many days of materials you're carrying.
- Measure warehouse and truck stock separately; they behave differently.
- The right number balances cash tied up against first-visit completion. Watch both together.
How do you calculate inventory turnover?
Divide the cost of the materials and parts you used on jobs during the year by your average inventory value at cost. Average inventory is usually the beginning plus ending inventory divided by two, or better, the average of monthly counts. Use cost on both sides: using sales revenue instead of cost overstates turnover by your markup.
Inventory turnover = Cost of materials used ÷ Average inventory
- Cost of materials used
- what you paid for parts and materials consumed on jobs in the period (the materials part of cost of goods sold)
- Average inventory
- (Beginning inventory + Ending inventory) ÷ 2, at cost; or the average of monthly counts
Days on hand = 365 ÷ Inventory turnover
- Days on hand
- about how many days your current stock would last at your normal usage rate
What is a good inventory turnover for a contractor?
There is no single good number for contractors, because it depends on the trade, how much equipment you stock versus order per job, and how far you are from suppliers. The useful comparison is against yourself over time, and between your own trucks. Rising turnover with a steady first-time fix rate means you're carrying less without hurting jobs; rising turnover with more supply-house runs means you cut too far.
| What you see | What it usually means | What to do |
|---|---|---|
| Low turnover, high first-time fix | Plenty of stock, but too much cash tied up | Cut slow movers; lower max levels on low-use items |
| Low turnover, low first-time fix | Wrong stock: lots of what you don't use, not enough of what you do | Rebuild the stock list from 12 months of usage |
| High turnover, high first-time fix | Lean and well-matched | Keep counting; watch seasons |
| High turnover, frequent stock-outs | Too lean or restocking too slowly | Raise min levels on fast movers; restock more often |
| One truck far below the others | Overstocked truck, or parts used and not recorded | Count that truck; check work orders against usage |
Inventory turnover by trade
| Trade | What's usually in inventory | What drives turnover |
|---|---|---|
| HVAC | Repair parts, filters, refrigerant; sometimes stocked equipment | Stocking equipment ahead of the season lowers turnover sharply; repair parts turn fast in peak months |
| Plumbing | Fittings, valves, pipe, water heaters | Water heaters are big-ticket; how many you stock moves the number most |
| Electrical | Wire, devices, breakers, boxes | Wire is bulky and price-volatile; buying in bulk to save money lowers turnover |
| Roofing | Mostly ordered per job and delivered to site | Leftover materials from jobs pile up in the yard; track and use or return them |
| Garage door | Springs, cables, openers | Many spring sizes; stocking every size slows turnover |
| Pest control | Chemicals and bait | Seasonal product buys; expiry dates matter |
| Landscaping and lawn care | Fertilizer, seed, irrigation parts, fuel | Strongly seasonal; measure turnover over the season, not just the year |
How do you improve inventory turnover?
- Rank items by usage (ABC). A items: the few parts making up most usage, counted often and never out of stock. C items: the long tail, stocked sparingly or ordered per job.
- Set min/max levels from actual usage, and restock to max on a schedule. See truck stock.
- Return or sell dead stock. Many suppliers accept returns of unused stock items; check your supplier's policy.
- Order big-ticket items per job when the supplier can deliver fast enough.
- Record every part on the work order so usage numbers are real, and stock isn't quietly drained.
- Count regularly. Cycle counts of a few bins a week beat one painful annual count.
Inventory turnover vs. days inventory outstanding
They are the same idea from two angles. Turnover says how many times a year inventory is used up; days inventory outstanding (days on hand) says how many days of stock you carry. Six turns equals about 61 days. Owners often find days easier to act on: '61 days of fittings on the shelves' is easier to picture than '6 turns'. Days inventory pairs with days sales outstanding to show how long cash is tied up before it comes back.
Common inventory turnover mistakes
- Using sales instead of cost. Revenue includes your markup, so turnover looks better than it is.
- Ignoring truck stock. For many service shops, most inventory is on the trucks.
- Using one year-end count. If inventory swings by season, an average of monthly or quarterly counts is far more accurate.
- Chasing turnover alone. A high number with techs driving to the supply house all day isn't a win. See technician utilization.
- Counting job-specific orders as inventory. Materials bought for and delivered to a specific job are job costs, not stock.
Frequently asked questions
What is the inventory turnover formula?
Inventory turnover equals the cost of materials used (or cost of goods sold) divided by average inventory, both at cost. Average inventory is usually beginning plus ending inventory divided by two. Divide 365 by the result to get days on hand.
Is a higher inventory turnover always better?
No. Higher turnover means less cash tied up, but if it comes with stock-outs, supply-house runs and return trips, it costs more than it saves. Track turnover alongside first-time fix rate and supply-house runs.
How do I calculate average inventory?
The simple method adds beginning and ending inventory for the period and divides by two. If your stock swings by season, add up monthly or quarterly counts and divide by the number of counts for a more accurate average.
What is the difference between inventory turnover and days on hand?
Inventory turnover is how many times inventory is used and replaced in a year. Days on hand is 365 divided by turnover: how many days of stock you carry. Six turns a year is about 61 days on hand.
Should contractors carry inventory at all?
Service contractors usually should carry common repair parts on trucks so jobs get finished on the first visit. Project contractors like roofers and remodelers often order materials per job and keep little stock. Carry inventory where it saves trips and wins jobs, and order the rest.
How does inventory affect taxes for a contractor?
Inventory rules for taxes can differ from how you track it for operations, and small businesses may have simplified options. Ask your CPA how to treat inventory and materials for your business. See cost of goods sold for the bookkeeping side.
Related
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