Days Sales of Inventory Formula Definition
Days sales of inventory (DSI) formula deals with the average time a company takes to turn its inventory into sales. It includes goods that are in progress or are already under sale. This method indicates the liquidity of an inventory representing how many days the company’s stock will last.
Significance of Days Sales of Inventory Formula (DSI)
The Days sales of inventory formula provides keen insight into the company’s profit and standpoint. Some of its significance include:
- Days sales of inventory formula help businesses determine if a company has outstanding performance.
- The formula enhances the growth of inventory and how swiftly it moves. This can further help take on storage and maintenance expenses, thus holding the inventory accountable.
- It helps to determine the carrying cost of an inventory, including the rent, insurance, and storage costs. It comes with other related expenses holding onto inventory that impacts the profit margin directly due to mismanagement.
Applications of Days Sales in Inventory Formula
The Days sales in the inventory formula is an essential factor for investors to determine liquidity in the business. There are several important applications of this formula, which are:
- It helps to establish an insight regarding the cash flows and returns.
- This will point the business to identify the company’s days sales which can incur profit.
The Days Sales in Inventory Formula
Days Inventory in Sales (DSI) =
Average Inventory
X 365 days Cost of Goods Sold (COGS)
Where,
Average Inventory = The mean value of the inventory calculated at a given period. Average inventory can be calculated
Average inventory =
(Beginning Inventory + Ending Inventory)
2
Cost of Goods Sold (COGS) = It refers to the sum of direct costs related to the product’s manufacturing.
COGS =
Beginning Inventory + Purchases – Ending Inventory
Understand With the Help of an Example
For example, a company sells TVs with an average annual inventory equivalent to ₱50,000. The company’s Cost of Goods Sold (COGS) was ₱150,000. Hence,
DSI = (50,000/150,000) x 365
=121.2 days
Inference
The days sales in Inventory Formula is an effective method to calculate the financial ratio of a company’s progress. It indicates the efficiency of sales in an e-commerce business. A high Days of Sales in Inventory tells you that the e-commerce business is unable to manage its inventory efficiently or that the inventory is difficult to sell.