What Is Product Turnover?

by Ronald Kimmons, studioD

Product turnover, or inventory turnover, is a measurement for the speed a company sells the products or inventory it has on hand. Unlike some other turnover rates in business, such as employee turnover, product turnover is a good thing for business, and business owners should hope to keep their product turnover numbers high.


One of the most important aspects of starting a business is the upfront costs. Even if you are confident that a business idea will work, if you do not have the money to implement it, you cannot make it work - thus necessitating borrowing or investing. Some of the upfront costs for businesses include real estate and equipment. For businesses that deal in large product inventories, one large upfront cost is the cost to stock inventory. To confidently market your product, you must have sufficient product available. To have product on-hand, though, you must spend money. Product turnover shows your business's ability to quickly recover expenses by selling items already in stock.


Calculate product turnover by using the following equation: T = C / I In this equation, T signifies product turnover, C signifies the total cost of product sold and I signifies the average value of product in inventory for the period you are measuring.


In deciding how much of a particular product to keep in stock, a company needs to project two figures. The first figure that a company needs is the speed at which it expects to sell a particular product, which is product turnover. The second figure is the speed at which it can acquire or produce more product. If the company expects that a boom in demand will occur soon, it may need to keep extra product in stock. If the company can quickly ramp up production to meet demand, though, this may not be necessary. However, while the second figure is important regarding product turnover, it is not an actual part of the product-turnover calculation.


Product-turnover calculations that result in large numbers show a healthy rate of product sales relative to the amount of product kept in inventory. Small numbers show that the company is keeping more product in inventory than what sales levels merit.


The demand for some products varies according to the season or other factors, such as the general economic climate. For this reason, a company that relies strictly on average product-turnover figures to determine how much of a product to keep in stock may lose out when large numbers of people suddenly want to buy their product or when demand for their product suddenly drops off to nothing. Such occurrences do not eliminate the usefulness of product turnover figures, but they do necessitate that companies take such cyclical factors into account when measuring and projecting product turnover.

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