What are Inventory Days?
Inventory days (also known as average days in inventory) represent the average number of days a company takes to transform its inventory into sales.
Significance of Inventory Days in E-commerce Business
Calculating inventory days becomes essential for businesses to calculate the efficiency of sales. Some of the benefits of inventory days in e-commerce business include:
- Avoiding stockouts and allowing e-commerce merchants to maintain the right inventory in stock
- Reducing the money spent on warehousing by retaining a low average of inventory days on hand
- Optimizing your inventory management
- Decreasing risks of spoilage
- Decreasing costs and enhancing cash flows
Applications of the Inventory Days Formula
Using the inventory days formula, companies can decrease the risk of stock spoilage. Some basic applications for inventory include:
- Helping e-commerce businesses predict customer demand
- Identifying inventories that are difficult to sell
- Determining the sales performance of a product
- Indicating the duration of time a business’ cash is tied up to the inventory
Inventory Days Formula
Definition of Each Element Used in the Formula
The inventory days formula involves the following elements:
Average inventory: It is the number of units a company usually holds in inventory. To calculate the average inventory,
Cost of Goods Sold (COGS): It is the total cost of procuring or manufacturing the products sold during a particular period. Companies can calculate COGS using the following formula:
Number of days: It is the amount of time you need to calculate the days in inventory. Usually, this number is 365.
How to Use the Inventory Days Formula to Calculate a Business’ Inventory Days?
Suppose Company X sells dental supplies. Its average inventory is A$1,000, and the cost of goods sold is A$50,000 for the year. You can get inventory days using the day sales in inventory formula as below:
Inventory Days = (A$1,000 / A$50,000) x 365 = 7.3 days.
What Can You Infer From the Result of the Days Inventory Formula?
The less time each product spends in inventory, the lower the storage cost. A smaller number of inventory days indicates the company’s efficiency in inventory management.