Your warehouse is full of stock—where has your cash gone? Start with inventory turnover days.

Main text

A warehouse packed to the rafters usually reassures a business owner: the goods are all there, and that feels solid. But a veteran CFO sees something else: how long before this stock turns into cash? Inventory turnover — a number most owners rarely watch — is often the very figure that decides whether the company lives or dies.

1. Why most business owners get it wrong

Most business owners look at the warehouse. Shelves stacked full, and they read it as a good sign: plenty of stock, plenty of confidence.

A veteran CFO applies a different standard: stock that does not sell is a cost, however good it looks. Goods were bought with cash; every day they sit in the warehouse, they tie up a day of your cash. Stock in a warehouse does not appreciate on its own — it only loses value: last season's models nobody wants, inventory going stale, plus storage fees and interest.

The companies that go under are often not short of profit; they have simply turned all their money into stock that will not move. The income statement may still show a profit, but the cash has long since been drained by inventory. One call from a supplier demanding payment, one payroll run, and the chain snaps.

Here is a benchmark to start with: the average inventory cycle in manufacturing is 90 days. Go above that and you are simply paying to carry dead stock — the goods will not sell and the cash will not come back, yet wages and supplier payments cannot wait a single day.

The more painful figure is this: for SMEs, the average time from paying out cash for purchases to collecting cash back is 128 days. A large part of those 128 days is stuck in the warehouse. The slower the inventory turnover, the more cash is tied up, and the thinner the company's margin of survival.

How does inventory quietly build up? Just three sources. Purchasing on a hunch: buying extra whenever something looks cheap, assuming it will come in handy eventually. Over-optimistic sales forecasts: stocking for a target twice as high, then selling only half. And product upgrades: last-generation items nobody wants, which you cannot bear to clear out, so they pile up year after year.

Each of these has a 'perfectly reasonable' justification. Add them together, and you have several million in cash lying in the warehouse, unable to breathe.

There is one more misconception: treating 'inventory equals assets' as a comfort blanket. The balance sheet shows inventory of USD 420K on the left-hand side, and the owner takes it as an asset and feels reassured.

But for a company short on cash, this 'asset' is no help in an emergency — suppliers want cash, banks want cash, and rent and wages accept only cash. It becomes a real asset only on the day inventory turns into cash; until it sells, it is just goods sitting on your money.

What matters even more is to add up the true cost of inventory: storage fees, damage, depreciation and the interest on the capital tied up — not one of these is missing. Many owners are reluctant to discount and clear stock because it feels like a loss. In fact, clearing at a 30% loss beats holding for a year: hold for a year and you may recover less than 50%, on top of storage and interest.

2. What inventory turnover days actually are

Remember this one idea: inventory turnover days measure how long your goods take from coming in to being sold. The fewer the days, the faster goods sell and the faster cash comes back; the more the days, the longer stock sits in your hands and the tighter your cash.

The formula, in one line: Inventory turnover days = average inventory ÷ cost of goods sold × 365 days.

Why use days instead of an amount? Because a figure has no context — you are holding USD 140K in inventory, but is that a lot? You have to measure it against the scale of your business. Dividing by cost of goods sold and multiplying by 365 days converts inventory into 'how many days it would take to sell it all' — a figure you can compare across industries and across company sizes.

What is average inventory? Opening inventory plus closing inventory, divided by two — an average that smooths out seasonal swings between peak and off-season.

What counts as inventory? Raw materials, work in progress and finished goods — all of it. Many people count only finished goods and leave out raw materials in transit and work in progress on the line, so the figure comes out shorter than reality — a self-comforting number, and the most dangerous kind. Work in progress is the worst: stuck on the production line, it can neither be sold nor returned, the cash that is easiest to forget.

Inventory turnover days and cash runway are a pair: cash runway tells you how many months the money in your account can still cover, while inventory turnover days tell you how much cash is still trapped in the warehouse. Look at both together to see the full cash picture of a company — watch only cash runway and you will miss that 'invisible cash' sitting in the warehouse.

To be fair, fewer days is not always better; it is a balancing act. Hold too little stock and you run out, lose orders and lose customers; hold too much and your cash is trapped and the company suffocates. A veteran CFO watches the rhythm: the industry benchmark is the reference point, a deviation within 20% is normal fluctuation, and anything beyond that calls for action. The number itself is not frightening; drifting away from the reference point is.

3. Two definitions you must not get wrong

The formula is simple; the traps are in the two definitions. Get one wrong and the number no longer reflects your real situation.

First, what exactly goes into average inventory? Opening plus closing, divided by two. Do not use only the closing figure — if your sales are seasonal, year-end inventory may happen to sit at a low point, and a single-point figure will come out artificially low. Use the average to reflect your true inventory level across the whole year.

Second, what exactly goes into cost of goods sold? Only the cost of the goods sold — raw materials, direct labour and manufacturing overhead, with no gross margin included. The most common mistake is dividing by revenue instead of cost of goods sold: revenue is far larger than cost, so the number of days comes out more than half too low. It looks safe, when in fact the alarm should have sounded long ago. Remember: use cost, not revenue.

One more trap: the books do not match reality. The ledger shows USD 420K in inventory, but a physical count may find only USD 330K — slow-moving materials, scrapped goods and in-transit items not yet booked all create the gap. So before you calculate average inventory, do a physical count and use the real numbers. Better an ugly figure than a book figure you feel good about.

These are the two definitions a veteran CFO will always pin down. Get the definitions wrong and even a perfectly accurate formula is a wasted calculation.

4. Let us run the numbers

An example. You are holding USD 420K in inventory, and last year's cost of goods sold was USD 1.7M.

Inventory turnover days = 3,000,000 ÷ (12,000,000 ÷ 365) ≈ 91 days.

What does 91 days mean? It means that, on average, 91 days pass from buying raw materials to selling the finished goods. The manufacturing benchmark is 90 days — you are already standing at the edge of the yellow light.

Take it one step further: if inventory rises from USD 420K to USD 630K, the figure becomes 4,500,000 ÷ (12,000,000 ÷ 365) ≈ 137 days, more than 50% above the benchmark — the red line. At that point supplier terms, payroll and bank interest are all pressing down, and the company is one step from a cash-flow break.

Do not assume 91 days is long and therefore normal. An average manufacturing cycle of 90 days is only a 'passing line', not a 'safety line'.

Here is another way to feel it: with annual cost of goods sold of USD 1.7M and average inventory of USD 420K, roughly three months of your cost of goods sold is permanently parked in the warehouse — and during those three months the raw materials have long been paid for and wages long since paid, while the goods alone still sit on the shelves.

Now look at the upside: if you can cut inventory turnover days from 91 to 60, at the same scale of business your average inventory drops from USD 420K to USD 270K — over USD 140K in cash released. How many quarters of payroll would that USD 140K-plus cover? That is why a veteran CFO treats inventory turnover days like a cash machine.

At this point an owner will often push back: 'I just carry more inventory than others — that is how my business works.' That sentence is itself a warning sign. The industry benchmark is an average drawn from the financial statements of many listed companies; if you keep deviating from it, your money is tied up longer and more passively than your peers'. A deviation can be understood, but it must not be taken for granted.

One line to remember: inventory turnover governs the speed at which goods turn into cash. When that speed slows, profit on paper is hollow. Spend five minutes working out the number today, and tomorrow you will know whether to cut stock, halt purchasing or clear inventory — that is how you turn inventory turnover from a noun into an action.

5. The industry benchmark table

Benchmarks vary widely by industry. Do not frighten yourself with someone else's number, and do not fool yourself with your own. Start with the benchmark for your industry:

Rule of thumb: 20% above the industry benchmark triggers a yellow light; 50% above triggers a red line.

Why 20% and 50%? At 20%, inventory is beginning to drift from its normal rhythm but is still within a controllable range — cutting aged stock and controlling purchasing can pull it back. At 50%, inventory has pushed past the cash-flow red line; small fixes will no longer work, and you must halt purchasing to stop the bleeding.

At the yellow light: start cutting long-aged stock, clear it even at a discount, and bring the cash back in first. At the same time, review which purchases can be postponed, and hold new orders until real inventory demand is verified.

At the red light: halt purchasing at once, sell the inventory you already have, and talk about everything else later. Do a thorough count of slow-moving materials — scrap what can be scrapped, discount what can be discounted. Do not begrudge the markdown loss: every extra day in storage burns money on warehousing, depreciation and interest; the sooner you clear, the sooner the bleeding stops.

6. Three checks to run now

First: count up the total value of your current inventory and write it down — raw materials, work in progress and finished goods all count.

Second: look up last year's cost of goods sold — find it in the income statement or the cost report, and do not use revenue.

Third: divide total inventory value by average daily cost of goods sold (annual cost of goods sold divided by 365), and work out how many days it takes you to sell your goods.

Once you have the number, compare it against your industry benchmark: above 20%, start clearing inventory; above 50%, halt purchasing at once. Do not wait until the warehouse is too full to move — by then your cash has long since been squeezed dry.

After the check, do not stop at 'now I know'. Put three numbers into your monthly management meeting: total inventory value, cost of goods sold and turnover days, updated every quarter. Then set one hard rule for purchasing: when inventory exceeds the benchmark by 20%, a purchase order needs a finance sign-off before it can be placed; above 50%, all purchasing stops. A rule written down is far more reliable than relying on self-discipline.

CFO toolkit | today's takeaways

Metric: inventory turnover days (also called stock turnover days). Formula: average inventory ÷ cost of goods sold × 365 days. Red lines: a warning at 20% above the industry benchmark and a red line at 50%; the manufacturing reference benchmark is 90 days.

How to act: count total inventory value and cost of goods sold once a quarter and work out turnover days each time. The key to inventory management is not 'it looks like it is selling', but knowing exactly how long your money has been tied up.

When you exceed the benchmark, do two things at once: first, cut long-aged stock and clear it even at a discount; second, halt purchasing and work through the inventory you already have.

Final thoughts

Profit is a number on paper. Inventory is cash locked at the bottom of the trunk. Remember: inventory turnover days are a mirror that shows exactly where your money is.

Three questions to leave you with:

First, how much stock are you sitting on right now, and what is that in cash?

Second, what was your cost of goods sold last year, and have you ever worked out your inventory turnover days?

Third, if a supplier suddenly demanded cash on delivery, how many months could the cash in your hands last?

After reading this, get two numbers from the warehouse and from finance: total inventory value and annual cost of goods sold. Work out your inventory turnover days in five minutes and see which range you fall into against the industry benchmark. Clear stock where it should be cleared and halt purchasing where it should be halted — rescue your cash from the warehouse first.

Next issue we will talk about payment terms: how long can you use your supplier's money? That matters far more than accounts receivable (AR). Tell us in the comments — how much inventory is your company sitting on right now?

Before a critical decision, have a veteran CFO review it first.

More financial diagnostic tools at Aithony.com (copy the link into your browser to open; get your report in 5 minutes).