- Average Inventory / (Cost of Goods Sold (COGS) / Days in the accounting period) …
- 50,000 / (250,000 / 365) = ~ 73 days of inventory on hand. …
- Days in accounting period / Inventory turnover ratio = Inventory days on hand. …
- 365 / 5 = 73 days on hand.
Why is knowing how to calculate days on hand important?
DOH enables businesses to track inventory and gauge how quickly it turns over so they can place the right number of orders. By doing this, they can spend less money overall, which they can then use for other expenses. It also ensures that products sell before their expiration. Additional benefits include:
What is days on hand?
Days on hand (DOH) is a metric used to determine how quickly, on average, a business sells its stock. This metric, also known as the days inventory outstanding or days of inventory on hand, aids a business in estimating how long its supply might last. Although companies with different stock and business models may prefer different averages, a low DOH demonstrates that a business is selling its inventory effectively.
How to calculate days on hand
Here are some easy steps you can take to figure out how many days your products will be on hand:
Examples of calculating days on hand
You can calculate DOH manually or by using a program because it has a fairly simple formula. Here are a few examples of how to determine the number of days on hand:
Example 1
In order to ensure that Gustavs Boot Company is selling its inventory at a profitable rate, the inventory manager determines their DOH. They first choose to compute for the previous two months, which is 61 days. 10,000 boots were in stock at Gustavs Boot Company at the start of those two months. They had 1,500 boots at the end of the two months. Inventory, labor, and utilities in the warehouse cost a total of $7,000 during that time. The inventory manager uses these figures to determine the DOH in the following manner:
Average inventory is equal to 5,750 boots or (10,000 + 1,500) / 2.
DOH = 5,750 / (7,000 / 61) = 50. 11 days on hand.
This enables Gustavs Boot Company to understand that, if it maintains its current rate of productivity, it might take an average of 50. 11 days to turn over its inventor. If Gustavs Boot Company wants to move inventory more quickly than that, the inventory manager may look into and change the business’ procedures. For example, they might order fewer boots to start with.
Example 2
Evita owns a bookstore and is curious about how many books she has sold in the last year. First, she uses the number 365 because she decided to calculate the DOH over the course of the entire year. She had 5,000 books in her inventory when the year began. She had an inventory of 2,300 books by year’s end. Her costs during that time totaled $500,000, which included paying employees, purchasing books, and paying rent for her store. This is how she calculates those numbers:
Average inventory is equal to 3,650 books or (5,000 + 2,300) / 2.
DOH = 3,650 / (500,000 / 365) = 2. 66 days on hand.
According to this calculation, Evita has spent an average of 2 66 days to turn over her inventory. This low figure indicates that Evita is effectively utilizing her resources and selling her books. This quick turnover model works well for Evita because there are always new books being released and she wants to make sure she has space for new orders.
Example 3
Graciela owns a business that sells coats, and she wants to determine whether she is placing the proper order and making the best use of her resources. She decides to measure DOH from November to the end of February, which would be 120 days in a non-leap year, because she sells the most product during the winter. She had 20,000 coats in stock when that time period started. She ended that time with 2,000 coats in her inventory. Graciela’s expenses during that time totaled $900,000 and included labor, materials for the coats, and utilities for her warehouses.
Here is the way Graciela calculates these numbers:
Average inventory equals (11,000 coats) / (20,000 + 2,000)
DOH = 11,000 / (900,000 / 120) = 1. 47 days on hand.
Graciela can see from this total that it took her an average of 1 47 days to move inventory in the winter. Even though this low figure demonstrates how successfully Graciela is using her resources and selling coats, she is aware that it only serves as a gauge of how well she performs during the season when demand for coats is at its peak. She might therefore only use this DOH figure to make wintertime plans.
Days on Hand
FAQ
How do you calculate days by hand?
Use the following equation to determine days on hand: DOH = average inventory / (COGS / number of days in your time period)
How do you calculate days in inventory?
The typical amount of time a business keeps its inventory before it is sold is called “days in inventory.” To determine days in inventory, multiply the period length, which is typically 365 days, by the cost of average inventory divided by the cost of goods sold.
How do you calculate on hand?
- Inventory Days on Hand = Average Inventory/(Cost of Goods Sold/# of Days in Your Accounting Period)
- (Beginning Inventory + Ending Inventory) / 2 = Average Inventory.
- Inventory Days on Hand = Number of Days in Your Accounting Period / Inventory Turnover Ratio
How do you calculate raw material days on hand?
In other words, the DOH is calculated by multiplying the result by the number of days in the accounting period after dividing the average stock by the cost of goods sold.
