Say you’re sitting on $2 million of inventory…How much of it is moving?
A lot of operators know their total inventory value, but I’d say only some are regularly looking at turnover, especially at the item level.
Inventory turnover measures how quickly your company is moving your stock within a certain period. To calculate it, use the inventory turnover ratio formula:
Inventory Turnover Ratio = COGS ÷ Average Inventory
Most teams miss this in their inventory accounting because total inventory looks fine on the balance sheet. Turnover problems only show up when you zoom in by item.
Quick example? We recently dug into this with a client and found over 700 units of one product line just sitting. And it was tying up six figures.
Here’s an easy-to-use measure for a quick idea of whether your inventory is obsolete, overstocked, healthy or starved:
Where to start with Inventory Turnover:
When we walk through inventory turnover with clients, we’re aiming to answer three different questions:
1). What is truly obsolete?
Should inventory turnover should inform an obsolescence policy? My answer? It’s the first place to look.
An item with a low turnover rate over an extended period, such as six months + no cost activity, is a trigger for inventory managers to ask questions about offloading or writing it down. (Plus, if you catch these slow-movers in time, you can potentially earn some revenue from them before they’re completely obsolete).
Run a flash sale, bundle it, scrap it, or write it down. Just don’t let it sit in limbo pretending to be an asset.
2). What is overfunded?
Items that are selling but represent 6–9 months of supply aren’t “healthy.” They’re tying up your cash that could be used elsewhere. Turnover helps you spot where you can safely reduce buys without hurting service levels.
3). What is underinvested?
The flip side matters just as much. Pair turnover with your backorder report. Chronic backorders often mean you’re starving the wrong SKUs while overfeeding the wrong ones.
If you’re using NetSuite it’s pretty simple to get started with this NetSuite KPI. This is one of the first analyses we run with new NetSuite accounting clients because it almost always uncovers trapped cash.
1. Run NetSuite’s standard inventory turnover report to see on-hand dollar value, sales velocity, turnover ratio (by item).
2. Sort by highest dollar value, and ask: “Are we selling this fast enough to justify what it’s costing us to hold it?” Freeing up stagnant inventory can do more for your cash than adding another sales channel.
3. Bonus: check in with your gross profit % by SKU:
Learn More about NetSuite Accounting for Retail & Ecomm
Inventory Backlogs and Their Cash Impact
Coming back to to the cash impact of inventory that’s just sitting. Remember, this balloons your carrying costs. So not only are you paying to have inventory decorating the warehoouse, you’re also losing out on cash from the sale.
The fix for that client with 700 units sitting there? A combination of offloading, creative resale channels, and rethinking minimum order quantities for slower SKUs.
Client Case Example #2
Here’s another example: a new NetSuite manufacturing client came to us with 2500+ units sitting. They were shipping under 400 units a month. At that rate, it would take almost 7 months to clear the backlog, without a single new order coming in. Think of this way: that’s 7 months of payroll and overhead just sitting on shelves in your warehouse.
And of course their fixed costs (payroll, overhead) were still burning up cash in the background. Plus you can imagine how that affects your customer relations.
A backlog is a cash trap. If you’re sitting on finished goods or partially kitted product, you’re sitting on cash that hasn’t cleared your bank account yet. Two things you can do if this feels familiar:
- Calculate your throughput ROI. Sometimes the best investment isn’t more marketing, it’s more capacity. Run the math: hiring one more technician or production team could unlock hundreds of thousands in cash.
- Go for a short-term boost, long-term gain. A temporary staffing ramp or operational push to clear backlog might feel expensive… but stretch it over 7 months of fixed costs, missed sales, and frustrated customers, and it’s likely the cheaper option.
New Products vs. Backlogged Inventory
I get the appeal.
New products are exciting and can feel like “strategy”. It’s energizing.
Meanwhile…
…your backlog sits there. An un-sexy problem. But pretty essential to inventory turnover.
And if production capacity is a constraint, every hour you spend on a new product is an hour not spent on the thing customers are already waiting for. New products pull engineering time, purchasing attention, manufacturing setup and management bandwidth away from the line that’s already backed up.
A new product that goes through the same constrained step as your existing products doesn’t grow your capacity. It competes with the orders you already have.
How to analyze backlogged inventory
Step 1: Convert units to dollars.
Take your open order count and multiply by your average order value. Be conservative on the average use the middle of the range, not the high end. If you have clear segments (standard vs. custom vs. premium), run it by segment.
Convert it to revenue per day. If you have $8M in backlog and your average fulfillment time is running 90 days when it should be 45, you’re looking at roughly $90K per day in delayed revenue recognition. That number is easier to act on than “backlog is growing.”
This is your gross backlog value.
If you’re in NetSuite, a few things that make this easier:
- Open work orders by stage.
- Once your work orders are properly set up, you can pull a report that shows exactly where each order sits in the production process, which means you can see, at any given moment, how many units are at each stage and what’s piling up..
- Use saved searches for financial backlog value. You can build a saved search that pulls open sales orders, multiplies quantity by price, and gives you a running backlog dollar figure without manually running the calculation every time.
If your NetSuite isn’t set up to give you this visibility, that’s a separate but important conversation. The data is almost certainly there. It just may not be configured to surface in a useful way.
Step 2: Subtract deposits collected.
Most businesses collecting deposits track this on the balance sheet as deferred revenue or customer deposits. Pull that number. Subtract it from your gross backlog value.
What’s left is the net cash you collect the moment you ship.
Step 3: Figure out what you’ve already spent.
For each major backlog segment, ask: what percentage of the component or raw material cost have we already purchased?
If you’re a manufacturer sitting on a significant backlog, there’s a good chance you’ve already bought most of what you need to build it. Which means the cost of clearing that backlog isn’t 60% of revenue. It’s mostly labor. The materials have already been paid for.
In NetSuite:
- Inventory on hand by component.
- Cross-reference your open backlog against on-hand inventory by component. This confirms how much of what you need to build is already sitting in your warehouse versus still on order
Step 4: Calculate your overhead burn per month.
How much does it cost you to run your business each month, regardless of how many orders you ship?
Payroll, rent, utilities, insurance, subscriptions. The number that runs whether you’re having a great month or a terrible one.
Now divide your net backlog value by that number.
That’s how many months of overhead is sitting locked in your backlog right now. For most manufacturers with a serious backlog problem, it’s a number that is not comfortable to look at.
Step 5: Map the constraint.
Now that you know the financial stakes, find out what’s slowing fulfillment.
Track on-time delivery rate as a core metric. This is the number that tells you whether your constraint is getting better or worse. If it’s declining while new products are being added to the pipeline, the causation is probably obvious.
Ask your operations lead: where do orders sit the longest before moving to the next step? That’s your constraint.
Once you’ve found it, every conversation about clearing backlog should be about that constraint. More labor in other parts of the process doesn’t help. More capacity at the bottleneck does.
Step 6: Prioritize by dollar value, not by whoever’s asking the loudest.
Sort your open orders by order value. High to low.
The highest-value orders at the top of that list represent the most cash per unit of production effort. In a constrained environment, that’s where you start.
Sounds obvious, but in practice, most backlogs get worked in a combination of first-in-first-out and whoever-called-yesterday. Neither of those is a financial prioritization framework.
Finally, put new product decisions through a capacity filter before a revenue filter. Before asking “how much can we sell?” ask “do we have the throughput to make it without degrading what we already promised?”
Introduce Inventory Controls
So how do we prevent these backlogs from even happening? Use inventory turnover to set up controls and reorder points.
Reorder points only work if they’re informed by turnover. Too many teams set reorder points once and never revisit them.
The result? Slow-moving items keep getting reordered while fast movers run out. Reorder points should flex as demand changes. If an item’s turnover is falling, its reorder point should come down. If turnover is accelerating and backorders keep showing up, the reorder point should move up. Static reorder points create dynamic problems.
Further, decide who can declare inventory obsolete, who can approve write-offs, and who can actually post adjustments. Remember, there’s an increased risk if the same person can do all three.
3 Key Takeaways
If you can’t answer which SKUs are overfunded, underinvested, or obsolete without exporting to Excel, that’s your signal. Inventory turnover is where control starts.
- Track your inventory turnover by item
- Clear the backlog
- Set controls and reorder points
Need help getting the insight from inventory turnover you need (or just inventory management in NetSuite in general?) Get in touch with us to get started.
