Inventory Turnover (AQA A Level Business): Revision Note
Syllabus Edition
First teaching 2026
First exams 2028
Exam code: 7132
What is inventory turnover?
Inventory turnover measures how many times a business sells and replaces its stock of inventory over a given period, usually a year
A higher inventory turnover generally shows that a business is selling stock quickly and efficiently
A lower figure can suggest stock is moving slowly or being overstocked
Monitoring inventory turnover helps a business and its stakeholders
Assess how efficiently stock is being managed
Compare performance over time
Spot problems such as overstocking or weak sales before they become serious
Calculating & interpreting inventory turnover
Inventory turnover is expressed as the number of times inventory is sold over a period of time, typically a year, and is calculated using the formula
Cost of goods sold is the direct cost of producing or buying the goods a business has sold in a period
Average inventory is the average value of stock held during the period, usually calculated as
Worked Example
An electronics retailer reports the following figures over two years:
Year | Cost of goods sold | Opening inventory | Closing inventory |
|---|---|---|---|
2024 | £465,000 | £64,560 | £72,870 |
2025 | £482,000 | £72,870 | £54,920 |
Calculate the inventory turnover in both 2024 and 2025.
2024 average inventory
2024 inventory turnover
2025 average inventory
2025 inventory turnover
Interpretation
Inventory turnover increased from 6.77 times to 7.54 times a year, even though the cost of goods sold rose
This means stock is being sold and replaced more frequently than before, and the business is holding relatively less inventory for the level of sales it's making
This could be a sign of faster-moving stock or lower levels of stockholding, tying up less cash and reducing storage costs compared with the previous year.
Examiner Tips and Tricks
Always state whether a change in inventory turnover is likely to be positive or negative for the specific business in the case study, as a falling figure isn't always bad if it reflects a deliberate decision to hold more buffer stock
Case Study
Fernlight Homewares
Fernlight Homewares is a retailer selling furniture and home accessories through several UK stores.
Over the past two years, the finance team noticed that inventory turnover had fallen from six times a year to four times a year, despite sales rising slightly.
Investigating the figures, managers found that several ranges of accessories had sold more slowly than expected, leaving increasing amounts of stock sitting in storage for longer periods. This tied up cash that could otherwise have been used to pay suppliers or invest in new ranges and increased the cost of warehouse space needed to store the surplus stock.
To address the issue, Fernlight reduced how much it ordered of its slower-selling ranges, introduced seasonal discounts to clear existing stock more quickly, and began reviewing inventory turnover every quarter rather than annually.
Within a year, inventory turnover had improved to five times, freeing up cash and reducing storage costs
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