When it comes to managing your inventory, determining an accurate days in inventory figure is an essential part of your overall strategy. Without an accurate figure, businesses may struggle to effectively manage their resources and ensure a healthy bottom line. Having an accurate days in inventory figure is a key factor in the success of any business, regardless of size or industry. Knowing how to calculate days in inventory is an important step in ensuring that the figure is reflective of the real time situation of the business. In this blog post, we’ll go over the basics of how to calculate days in inventory, so you can make sure your numbers are up to date and accurate.
How to calculate days in inventory
You can calculate days in inventory with this formula:
Days in Inventory = Period Length x (Average Inventory / Cost of Goods Sold)
To calculate days in inventory, you need these details:
What is days in inventory?
A low number for days in inventory can be a sign that a business is effectively trading its goods for cash and operating. A company may need additional assistance in certain areas, such as developing or revising a brand image or adjusting to changes in the industry, if it discovers that its conversion through sales is slow.
What is inventory turnover ratio?
Using the following formula, you can determine the inventory ratio by dividing the cost of goods sold by the average inventory for the same time period.
Inventory Turnover Ratio = Cost of Goods Sold / Inventory
5 steps to calculate days in inventory
Here are five steps for calculating days in inventory:
1. Find the average inventory
Find the company’s average inventory if you want to calculate days’ worth of inventory. Add the value for the quantity of inventory units a company has at the start of the period to the value of inventory units at the end of the period to determine the average inventory. Then, divide that number by two to find the average.
Pet Food Solutions’ average inventory, for instance, is $10,000 if they start the year with $12,000 in stock and end it with $8,000 in stock.
2. Calculate the cost of goods sold
In the Pet Food Solutions example, the calculation would be ($12,000 + $3,000) – $8,000 if the company had a cost of goods of $3,000. Therefore, the cost of goods sold is $7,000.
3. Determine the period length
Select the time frame for which you want to calculate the days in inventory. Regardless of the period you choose to assess, you should express the length of the period as a number of days. For instance, the length of your period would be 61 if you wanted to consider the two months of March and April.
For the Pet Food Solutions example, you will represent this value as 365 because the period length is one year.
4. Divide the average inventory by the cost of goods sold
The first step of the two-step formula for days in inventory is to divide the average inventory value by the cost of goods sold.
This portion of the calculation should divide $10,000, the average inventory, by $7,000, the cost of goods sold, using Pet Food Solutions as an example. This results in a figure of 1. 43, rounded to the nearest hundredth.
5. Multiply the results by the number of days in the period
By multiplying the result of dividing the average inventory by the cost of goods sold by the number of days in the period you’re analyzing, you can determine the days in inventory.
Given that the Pet Food Solutions example’s time frame is one year, you can multiply 365 by the previous step’s outcome, which is 1, to get the answer. 43. Therefore, Pet Food Solutions’ days in inventory are 521. 95 days. Pet Food Solutions can use the information to enhance its operations because this is a good result.
3 examples of calculating days in inventory
Here are some examples of calculating days in inventory:
Example 1
Dental offices in the area can purchase dental supplies from All Smiles Dental Suppliers. The company’s average annual cost of goods sold is $40,000, and its average inventory is $1,000. What is the result of its days in inventory over a year?
You can calculate the days in inventory by multiplying ($1,000 / $40,000) by 365. As a result, the days in inventory is 9. 13 days. This is a poor performance, demonstrating All Smiles Dental Suppliers’ effective market operations and sound financial management.
Example 2
Roberts Repairs provides mechanics with repair services and sells replacement parts. Its annual cost of goods sold is $71,000, and its average inventory is $5,000. What is the result of its days in inventory over a year?
You can calculate the days in inventory by multiplying ($5,000 / $71,000) by 365. According to this calculation, Roberts Repairs’ days in inventory are 25. 7 days. The company can interpret this as a modest outcome, indicating that Roberts Repairs is effectively managing and keeping an eye on its finances.
Example 3
For its small town, Green Grocer is a grocery store that sells organic food items. The cost of goods sold is $20,000, and the average annual inventory is $2,000 How many days does the store’s inventory spend on average over the course of a year?
You can calculate the days in inventory by multiplying ($2,000 / $20,000) by 365. The findings show that Green Grocer’s days in inventory are 36. 5. Executives at Green Grocer are aware that this number of days in inventory may be high for a grocery store and that they can modify their operations to be more productive financially and operationally.
Days in Inventory Formula (Formula, Calculator) | Excel Template
FAQ
How do you calculate inventory days 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
Why do we calculate inventory days?
- Closing stock divided by cost of goods sold equals 365 days in inventory.
- Days Sales in inventory = (INR 20000/ 100000) * 365.
- Days Sales in inventory = 0.2 * 365.
- Days Sales in inventory= 73 days.
How do you calculate days on shelf inventory?
Because it enables proper allocation of inventory storage costs (which are included in the total cost of inventory), an inventory days estimate is beneficial for distribution businesses. The cost of storage decreases with the amount of time each item spends in inventory.
