Turn time refers to the period of time it takes a business to sell a product. The inventory turnover rate measures the number of times we have turned our inventory during the past 12 months.
The following formula determines the inventory turn time:
Inventory Turn Time = Cost of Goods Sold from Stock Sales during the Past 12 Months/ Average Inventory Investment during the Past 12 Months
Cost of Goods Sold only includes orders shipped from a warehouse inventory. Direct shipments or special orders are not included because they are never "inventoried".
Inventory turnover is based on what you pay for an item (acquisition cost), not the selling price.
To determine your average inventory investment:
Calculate the total value of every product in inventory (quantity on-hand times cost) every month, on the same day of the month. Use consistent costing methods for COGS and average inventory investment.
If your inventory levels fluctuate over a month time horizon, calculate your total inventory value on the first and fifteenth of every month.