What Is Inventory Turnover? A Guide for Canadian Small Business Owners

One of the most difficult parts of running a product-based Canadian business is managing inventory. Buy too much, and your cash gets tied up in stock that gathers dust. Buy too little, and you risk running out of your bestsellers when demand picks up. Managing inventory is a constant balancing act between keeping your customers happy and your products moving off the shelves. In fact, in 2024, 18% of inventory holding businesses reported holding higher levels of inventory than they would have hoped.

That’s why understanding of inventory turnover is important.

Inventory turnover is more than just a financial metric; it’s a window into how efficiently your business is operating. Done right, it helps you avoid cash flow crunches, reduce waste, and stay ahead of customer demand.

This guide breaks down exactly what inventory turnover is, how to calculate it, and how to use the results to make smarter decisions for your small business.

Key Takeaways

• Inventory turnover measures how many times you sell and replace your stock in a given period.
• A high turnover usually signals strong sales or efficient inventory management, while low turnover may suggest overstocking or weak demand.
• Use this formula: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory.
• Improving turnover can reduce holding costs, improve cash flow, and boost long-term profitability.

What Is Inventory Turnover?

It’s a key financial metric used by accountants, lenders, and business owners alike to assess business health. Inventory turnover tells you how much product you sell and restock over a given period—usually monthly, quarterly, or annually. In other words, it helps you track whether your inventory is generating revenue or tying up cash.

To fully understand how inventory turnover fits into your business, it’s helpful to know a few related terms. These concepts give you a clearer view of how your stock moves and when it’s time to take action. Here’s a quick rundown:

• Inventory on Hand: How much stock you’re currently holding.
• Reorder Point: The inventory level at which you need to order more to avoid stockouts.
• Obsolete Inventory (Dead Stock): Products that are no longer sellable due to expiration, seasonality, or lack of demand. This ties up cash and reduces profitability if not addressed.
• Inventory Turnover Ratio: Another term for the same concept—how many times you sell your inventory in a given period.

Why Inventory Turnover Matters for Small Businesses

If you run your own business, you’ve likely heard it before—success is all about balancing supply and demand. You need to keep your products moving, but also keep enough in stock to meet customer needs. The last thing you want is to run out of a popular product or get stuck with items that sit untouched for months. That’s where understanding inventory turnover comes in. It helps you spot potential problems early, so you can adjust your ordering, pricing, or promotions before your cash flow or profits take a hit.

Here’s what different turnover rates can tell you:

Low Turnover

This usually means excess stock is sitting on your shelves too long. That ties up your cash, increases storage costs, and raises the risk of spoilage or obsolescence—especially in food, fashion, or tech.

However, low turnover isn’t always a red flag. In certain situations, it can be a strategic move:

• Inflation: Holding extra inventory can protect you from rising supplier costs. Buying ahead of price hikes helps preserve your margins.
• Supply Chain Disruptions: Stockpiling inventory may be smart if you anticipate shortages or shipping delays. 

The key is knowing why your turnover is low. If it’s intentional—due to forward planning—it could benefit your business. But if it’s accidental, it might be time to review your purchasing or sales strategies.

High Turnover

High turnover generally means efficient operations and good cash flow. But if it’s too high, you might be under-ordering or missing sales opportunities because you’re constantly out of stock.

How to Calculate Inventory Turnover (Formula + Example)

Knowing your inventory turnover is one thing—calculating it is another. The good news? It’s easier than you might think. By tracking just a few key numbers, you can quickly understand how often you’re selling and replenishing stock. This isn’t just a bookkeeping exercise—it’s a powerful way to spot trends, prevent overstocking, and fine-tune your purchasing strategy. Here’s how to do it: 

Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory

How to find Average Inventory:

To calculate inventory turnover accurately, you’ll need to know your average inventory for the period you’re measuring. This is especially helpful for seasonal businesses as it smooths out fluctuations or one-off stock changes, giving a clear picture of your typical inventory levels. The formula is straightforward:

(Beginning Inventory + Ending Inventory) / 2

Example: Calculating Inventory Turnover for a Small Retail Business

Let’s imagine you run a small clothing boutique that sells apparel and accessories. You want to know how efficiently your shop is managing its inventory, so you decide to calculate your inventory turnover for the year.

Step 1: Gather Your Numbers

• Cost of Goods Sold (COGS) for the year: $150,000
• Beginning Inventory (January 1): $25,000
• Ending Inventory (December 31): $35,000

Step 2: Calculate Average Inventory

Use the average inventory formula to smooth out seasonal ups and downs:

Average Inventory = (Beginning Inventory+Ending Inventory) / 2

Average Inventory = (25,000+35,000)/2 = 30,000

Step 3: Calculate Inventory Turnover

Now apply the inventory turnover formula:

Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory

Inventory Turnover = 150,000 /30,000 = 5

What This Means

In this example, your boutique turned its inventory over 5 times during the year. That means, on average, you sold and replenished your stock five times over the course of 12 months.

A turnover of 5 is typically healthy for a retail apparel business, but it’s important to compare this number to your own goals or industry benchmarks. If your target is 6 or 7, you may want to look for ways to speed up sales or reduce how much you’re ordering at once.

Average Inventory Turnover by Industry: What’s Normal?

Inventory turnover benchmarks can vary widely depending on the type of business you run. For example, a grocery store or fast-fashion retailer will naturally have a much higher turnover rate than a furniture shop or manufacturing business that holds specialized equipment parts.

While Canadian-specific data is limited, recent Q1 2024 data from CSI Market (which reflects U.S. businesses) gives us a helpful snapshot of average inventory turnover rates across industries:

A Note for Canadian Business Owners:

While this data offers a useful reference point, keep in mind that it reflects U.S. companies and may not align exactly with Canadian benchmarks. Differences in market size, consumer behaviour, and supply chain logistics can all affect turnover rates between countries.

How to Improve Your Inventory Turnover Ratio

If your inventory turnover is too low—or you’re constantly dealing with slow-moving stock—it can drain your cash flow and take up valuable space. The good news? There are several proactive steps you can take to improve your turnover rate, free up capital, and keep your business running more efficiently. Here’s how:

1. Use Inventory Management Software

Modern inventory management tools help you track what’s selling (and what’s not) in real time. Software like QuickBooks Commerce, Shopify POS, or TradeGecko can automatically update your stock levels, generate reorder alerts, and give you insights into your best and worst performers—making it easier to avoid overstocking or running out of key items.

2. Forecast Demand More Accurately

Look at your historical sales data to identify trends. Are there seasonal peaks or predictable slow periods? Do certain products always sell better at specific times of the year? Accurate demand forecasting helps you order the right amount of inventory—reducing the risk of stockouts or excess stock.

3. Run Promotions or Discounts for Slow-Moving Items

If you have products that just aren’t moving, consider offering limited-time discounts or bundling them with popular items. This clears shelf space, recovers some of your investment, and prevents losses from spoilage or obsolescence—especially in industries like food, fashion, or tech.

4. Negotiate with Suppliers for Smaller or Faster Orders

Talk to your suppliers about adjusting your order sizes or delivery timelines. Instead of buying in large bulk just for a discount, see if you can negotiate smaller shipments more frequently. This reduces storage needs, limits the risk of excess stock, and keeps your inventory fresher and more aligned with customer demand.

5. Avoid Over-Ordering for the Sake of Bulk Discounts

Bulk buying might seem like a cost-saver, but it’s only smart if the volume matches your sales patterns. Otherwise, you’re tying up cash in products that take months (or longer) to sell. Focus on just-in-time inventory strategies where possible—buy what you need, when you need it.

Inventory Turnover vs. Days in Inventory

Inventory turnover ratio is important to understand, but sometimes it’s easier to think in terms of time rather than ratios. That’s where Days in Inventory can be useful. This metric tells you the average number of days a product sits on your shelves before a sale. It transforms the turnover ratio into something more tangible and day-to-day.

The Formula:

Days in Inventory = 365 ÷ Inventory Turnover

For example, if your inventory turnover is 5, here’s the calculation:

365 ÷ 5 = 73 days

This means your average product sits in stock for 73 days before it sells.

Why Days in Inventory Matters:

• Easier visualization: Many business owners find it simpler to think in days, especially when managing perishable goods, fashion items, or seasonal stock.
• Cash flow planning: If you know how long your products typically sit before selling, you can better plan for reorders, sales cycles, and cash flow needs.
• Spotting bottlenecks: Days in Inventory can highlight where things are getting stuck—so you can adjust marketing, pricing, or purchasing strategies accordingly.

Whether you’re running a retail shop, a cafe, or an e-commerce business, knowing both your turnover ratio and your Days in Inventory gives you a clearer, more actionable picture of how your inventory is performing.

The Full Picture: Why Inventory Turnover Isn’t the Only Number That Matters

As mentioned previously, inventory turnover is a powerful metric, but it isn’t the only powerful metric. It’s important to consider the full context before making decisions that can impact the success of your business. Here are a few things Canadian small business owners should keep in mind:

Industry Differences

Not all businesses should aim for the same turnover rates. A bakery, for example, will naturally move through inventory faster than a furniture retailer or specialty boutique. Comparing turnover ratios across different industries, or even different product lines, can be misleading. The key is to benchmark against businesses in your sector or review your own past performance for trends.

Seasonal Business Cycles

Many Canadian businesses experience seasonal swings. Whether you run a landscaping service, ski shop, or retail store, your busiest months will naturally produce higher turnover rates. If you only look at annual averages, seasonal highs and lows can skew your numbers. It’s helpful to calculate turnover for different periods (quarterly, seasonally, or even monthly) to get a clearer picture.

Fluctuating Costs

Inventory turnover calculations rely on cost of goods sold (COGS), but COGS can change due to fluctuating supplier prices, fuel costs, or currency shifts, especially for businesses importing goods. If your COGS rises or falls sharply, it may distort your turnover ratio and make year-over-year comparisons tricky.

Overlooking Carrying Costs

While high turnover often signals efficiency, keeping minimal stock on hand isn’t always the cheapest approach. Running too lean can result in:

• Stockouts and missed sales
• Rush shipping costs for emergency restocking
• Lower customer satisfaction due to frequent “out of stock” notices

Balancing turnover with customer expectations and inventory carrying costs is key to long-term success.

Lead Times and Replenishment Delays

Turnover ratios don’t reflect how long it takes to restock. If you rely on long lead times from suppliers, common in industries like manufacturing, apparel, or imported goods, you could end up with empty shelves even if your turnover rate looks healthy. This makes it important to pair turnover analysis with careful supply chain planning.

Bottom line: Inventory turnover is a useful indicator, but it shouldn’t be your only metric. Pair it with cash flow analysis, supplier lead time reviews, and customer satisfaction tracking to make well-rounded decisions for your Canadian business.

How Merchant Growth Can Help You Optimize Inventory and Cash Flow

Improving inventory turnover often means investing in better tools, smarter purchasing, or even bulk buys to secure better pricing. But that takes capital—and tying up too much of it in stock can strain your cash flow.

That’s where Merchant Growth comes in.

Our flexible term financing and lines of credit are designed for small businesses that need help smoothing out cash flow gaps while managing inventory cycles. Whether you need funds to:

• Purchase inventory at a discount
• Invest in inventory management software
• Launch marketing campaigns to move products faster

We’re here to help you grow, not get stuck.

Better inventory turnover = stronger cash flow = more opportunities for growth.

Let’s Talk.

Contact Merchant Growth today about financing solutions that help your inventory work smarter—not harder.