Inventory turnover
Inventory turnover measures how many times a business sells and replaces its stock over a period — cost of goods sold divided by average inventory. A high number means stock moves fast; a low or falling number often means inventory is aging, overbought or no longer sellable at the value shown on the books.
The number on its own means little without context — a jeweller and a grocer turn inventory at completely different rates and both can be healthy. What matters in diligence is the trend and the composition: is turnover slowing year over year, and is that slowdown concentrated in a few product lines that might no longer be sellable at all?
What a slowing number signals
- Stock that is obsolete, seasonal-out-of-season, or damaged and still carried at full cost
- Overbuying relative to actual demand, tying up cash unnecessarily
- Pricing or product-mix problems the income statement has not caught up to yet
Why it matters at closing
Inventory is usually counted and valued on or near closing day, and stale stock is exactly what a buyer does not want to pay full price for. A wide gap between the book value of inventory and what a physical count and a walk-through actually confirm is one of the more common last-minute price adjustments in a small business sale.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Treadstone LawLegal commentaryInventory Count and Valuation on Closing Day in an Ontario Business Sale
- 02Treadstone LawLegal commentaryHow to Read a Business's Financial Statements Before You Buy in Ontario
- 03Treadstone LawLegal commentaryEquipment and Asset Condition Checks Before Buying a Business in Ontario
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