Inventory Turnover Ratio: Is Your Stock Working for You or Against You?
By Meliza Angelica S. Estinopo

When I first sat down with a retail client in early 2024, they proudly showed me a storeroom brimming with products. Sales were okay, but their cash flow told a different story—tight, unpredictable, and stressful. After reviewing their numbers, one KPI told me everything I needed to know: Inventory Turnover Ratio.

✅ What is Inventory Turnover Ratio?

This ratio tells you how many times your business sells and replaces its inventory within a period—usually a year. It's calculated like this:

Inventory Turnover = Cost of Goods Sold / Average Inventory

If your turnover is too low, it may mean stock is piling up and not converting into cash. Too high, and you might be losing sales due to understocking.

📦 What I’ve Seen in Real Businesses

In my experience, Philippine small businesses (especially in retail, food, or e-commerce) often focus heavily on sales and marketing—without regularly analyzing whether their inventory strategy aligns with cash flow and customer demand.

Some telltale signs:

• Items collecting dust for months

• Buying in bulk “para makamura” but tying up too much capital

• Stockouts on bestsellers because purchasing was gut feel, not data-driven
  
  

💸 Why It Matters More in 2025

With tighter consumer spending and stricter BIR tax rulings this year, having idle inventory is not just a missed opportunity—it's a risk.

Inventory that's not moving:

• Increases storage and handling costs

• Ties up working capital you could use elsewhere

• Could lead to spoilage, obsolescence, or markdowns

• May mislead you about your real profitability in your Financial Statements
  
  

Plus, BIR auditors reviewing your financials might raise questions if your ending inventory and cost of goods sold (COGS) don't reconcile smoothly. We’ve seen cases where businesses unintentionally raise red flags just by failing to match purchases and sales logically.

📈 How We Help Clients Use This Ratio

At Estinopo Accounting Firm, we guide our clients to:

• Regularly monitor Inventory Turnover

• Create policies for inventory levels based on data

• Analyze gross profit alongside turnover to avoid unnecessary purchasing

• Clean up old stock and re-align purchasing to real-time demand

• Ensure that accounting books reflect true inventory movement and not just theoretical values
  
  

This KPI becomes even more powerful when viewed alongside:

• Gross Profit Margin

• Sales Trends

• Cash Conversion Cycle
  
  

Together, they form a dashboard of how healthy and responsive your business is.

🧠 A Thought to Leave You With

The goal is not just to move inventory, but to move the right inventory, at the right time, for the right margin.

So, the question isn’t just: “Do I have stock?”
It’s: “Is my inventory working for me - or silently dragging me down?”

Let’s make sure your numbers tell the right story.
Let’s make sure your business is lean, profitable, and future-ready.

Need help understanding how your inventory affects your cash flow and taxes? Let’s simplify it together.