Inventory Turnover & EOQ Calculator

Inventory turnover measures how many times a business sells and replaces its stock in a year. It is one of the more revealing operational ratios because it sits at the intersection of sales performance and capital efficiency: low turnover means cash is sitting on shelves rather than working, while very high turnover can mean stock is so lean that sales are being lost to stockouts.

There is no universally good number. Grocery and fresh food run very high turnover out of necessity; heavy machinery, jewellery and specialist parts run very low and are perfectly healthy doing so. The meaningful comparisons are against the same business over time and against direct competitors, not against a generic benchmark.

Turnover must use cost of goods sold, not revenue. Inventory is carried on the balance sheet at cost, so dividing revenue by inventory compares a marked-up number against an unmarked-up one and inflates the ratio by exactly the gross margin. A business with a 60% margin would appear to turn its stock 2.5 times faster than it really does.

The same logic drives days inventory outstanding, which is simply 365 divided by turnover and is often the more intuitive figure — "we hold about 73 days of stock" lands better with most people than "we turn 5 times".

Economic order quantity answers a different question: given that you will sell a known quantity this year, how much should you buy at a time? Two costs pull against each other. Ordering frequently in small batches keeps average inventory low, so holding costs fall, but each order carries a fixed administrative cost that then gets incurred more often. Ordering rarely in large batches does the reverse.

The EOQ formula finds where their sum is lowest, and it has been in continuous use since Ford Harris derived it in 1913 — remarkable longevity for a model that fits on one line. Its enduring value is less the precise answer than the framing: it makes explicit that order size is a cost optimisation rather than a matter of habit or supplier convenience.

The most practically useful property of EOQ is one the formula does not advertise: the total cost curve is extremely flat near its minimum. Ordering 25% above or below the theoretical EOQ typically raises total cost by only 2–3%. Even ordering double the EOQ costs around 25% more, not double.

This matters because the inputs are usually estimates. Holding cost per unit in particular is a judgement call involving storage, insurance, obsolescence risk and the opportunity cost of tied-up capital — commonly approximated as 20–30% of unit cost. The flatness of the curve means a rough EOQ still captures most of the available saving, which is why the model survives despite its inputs rarely being precise. The sensitivity table above shows this directly.