Inventory Velocity: A Guide for Makers and Small Handmade Businesses
Learn how to calculate your inventory velocity (turnover rate), understand what it means for your handmade business, and use it to make smarter stock decisions.
Inventory velocity — also called inventory turnover — tells you how quickly you’re moving through your stock. For makers, this number tells you whether you’re tying up too much cash in materials, or running the risk of stockouts.
One of the most useful metrics at a maker’s disposal is inventory velocity: a measure of how quickly inventory moves through your production process so you can identify issues and bottlenecks and take action before they become problems.
Knowing your inventory velocity is the difference between guessing your reorder timing and actually having a system for it.
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Here, we’ll dive into what inventory velocity means for handmade businesses, how to calculate it, and what to do with the number once you have it.
Understanding Inventory Velocity
Inventory velocity tracks more than just the speed at which inventory moves — it reflects the health of your sales productivity and supply chain.
Inventory velocity, also known as “inventory turnover”, is a metric that measures how many times you sell and replenish your inventory within a specific period — typically a year.
By calculating inventory turnover, makers can gauge whether they’re holding an optimal amount of stock to meet demand effectively.
Benefits of Calculating Inventory Velocity
Before we get into the nuts and bolts of calculating inventory velocity, let’s take a quick look at why this metric matters for your craft business:
Improved Forecasting Accuracy: By measuring inventory velocity, makers get a clearer picture of which products are moving quickly and which are slower to sell. This data is invaluable for predicting future product demand and improving your supply chain planning accordingly.
Better Inventory Management and Cash Flow: A high inventory turnover means efficient stock management. This not only reduces the risk of stockpiling but also ensures your cash is not tied up in unnecessary inventory, freeing up funds for other areas of your business.
Enhanced Customer Satisfaction: Customers are generally unforgiving towards out-of-stock situations. With inventory velocity, you can restock your fast-moving items proactively, providing a smooth shopping experience and fostering repeat business. When makers have a healthy inventory velocity, it’s a sign of good inventory management.
How to Calculate Your Inventory Velocity
Inventory velocity is calculated by dividing your Cost of Goods Sold (COGS) by your average inventory value over a set period — typically monthly or annually.
In this section, we’ll outline exactly how to calculate your Inventory Velocity / Inventory Turnover Rate.
The basic formula for calculating your turnover rate is:
Inventory Turnover Rate = Cost of Goods Sold (COGS) / Average Inventory Value
Let’s break this down a little to make sure each part of this turnover formula is clear:
Cost of Goods Sold (COGS): This refers to the total cost incurred for producing and selling your products, including materials, labour, and direct expenses. Not sure how to calculate this? See our blog post here: How to calculate your COGS
Average Inventory Value: This is the average value of your inventory over a specific period. To calculate this, add up the start and end inventory values for a given period (e.g., monthly or annually) and divide by two.
Analysing your Inventory Turnover Rate Result
Ideally, a healthy inventory turnover rate falls within the range of 2 to 4.
So what happens if your inventory turnover is outside of this range?
A rate below 2 signals an excess of stagnant inventory (i.e you are holding too much stock), while a rate exceeding 4 indicates a heightened risk of stockouts (i.e. you aren’t holding enough stock).
The power that comes with knowing your inventory turnover rate is that now you can do something about it.
Let’s take a quick look at an example to consolidate the thinking:
Imagine a scenario where you own a flourishing soap business, called Pure Suds Co. After experiencing a surge in demand and a couple of stockout situations, you quickly realize managing inventory through static numbers in spreadsheets isn’t sustainable. You decide to calculate your Inventory Velocity to improve operations.
In January, your COGS was $20,000. Your inventory value at the beginning of January was $5,000, and by the end, it increased to $10,000, giving you an average inventory value of $7,500. Using the formula provided:
Inventory Turnover Rate = COGS / Average Inventory ValueInventory Turnover Rate = $20,000 / $7,500 = 2.67
This turnover rate is within the “healthy range” which indicates that, in general, Pure Suds Co. has an inventory strategy that is well managed.
Strategies to Improve Inventory Velocity
Calculating your inventory velocity is merely the beginning. The real value comes from using that number to make better decisions about how you stock, order, and produce.
So what can you do if you find your inventory velocity is outside of the desired range?
Let’s firstly take a look at some steps you can take if you have an inventory velocity under 2 (as a reminder, this is a velocity where you have too much stock on hand):
- Evaluate your production process: identify and address any bottlenecks that are slowing down inventory turnover.
- Review your purchase order history for raw materials: are you ordering too far ahead of time, or ordering too much each time? Consider ordering smaller amounts more often to smooth out your cashflow.
- Analyse your sales data: pinpoint which products are selling slowly and consider phasing them out, bundling products to encourage multiple sales, or offering promotions to increase their movement.
And if you have an inventory velocity above 4 (this means you aren’t holding enough stock):
- Increase your safety stock levels: this can help avoid stockouts during high demand periods.
- Improve demand forecasting: invest in tools like Craftybase to accurately predict and meet future product demand (we’ll cover this below in more detail).
Using Technology to Improve Your Inventory Management
Inventory tracking software can simplify the process of monitoring sales and stock movements. It also helps you make data-driven decisions rapidly, adapting to demand changes with confidence.
Integrating an effective inventory tracking system like Craftybase can drastically enhance your handmade business’s operational efficiency.
Craftybase offers a specialised inventory solution that caters specifically to the needs of makers, simplifying the complex process of tracking your products, materials, and costs.
With real-time analytics and tailored reports, it provides invaluable insights for improving your inventory turnover.
Ready to get a clearer picture of how your inventory is moving? Start your free Craftybase trial today.
Frequently Asked Questions
What is inventory velocity and how is it calculated?
Inventory velocity — also called inventory turnover — measures how quickly you sell and replenish your stock over a set period. To calculate it, divide your Cost of Goods Sold (COGS) by your average inventory value for that period. A result between 2 and 4 is generally considered a healthy range for small handmade businesses.
What is a good inventory velocity for a small handmade business?
For most small handmade businesses, a healthy inventory turnover rate falls between 2 and 4. A rate below 2 suggests you're holding too much stock and potentially tying up cash in materials that aren't moving. A rate above 4 signals you may be at risk of stockouts and should consider increasing safety stock or improving demand forecasting.
How do I improve my inventory velocity if it's too low?
If your inventory velocity is below 2, start by reviewing your purchase order history — are you ordering too much at once or too far in advance? You can also analyse your sales data to identify slow-moving products and consider bundling them, running promotions, or phasing them out. Ordering smaller amounts more frequently tends to be the most effective way to smooth out cash flow and improve turnover.
What does a high inventory velocity mean for a maker?
A high inventory velocity (above 4) means your products are selling faster than you can replenish stock, which puts you at risk of stockouts. While it sounds like a good problem to have, running out of materials mid-order is costly and frustrating for customers. If your velocity is consistently high, it's a signal to increase your safety stock and review your demand forecasting process.
Can Craftybase help me track inventory velocity?
Yes — Craftybase is specifically built for small-batch makers and tracks the data you need to calculate inventory velocity automatically. It records your COGS, monitors materials and finished product stock levels in real time, and surfaces the sales and cost data you need to stay on top of your inventory turnover. Start a free trial here.
Conclusion
Inventory velocity is not just another data point. It tells you whether your handmade business is running lean and meeting demand — or holding too much stock and draining cash you could be putting back into production.
Armed with the formula and strategies in this guide, you now have a clear way to measure your inventory turnover and improve it over time.
