What is an Inventory, Days of?
Days in inventory, also known as inventory turnover days, is a measure of how long it takes for a company to sell its inventory. It allows companies to determine their efficiency of sales. Inventory days of sales also indicate the number of days a company’s current stock will last.
Significance of Inventory, Days of
Days in inventory are an indicator of how efficiently a company manages its inventory. It indicates how many days it takes a company to liquidate its inventory.
Generally, a low days in inventory means that the company is able to quickly sell its inventory, indicating efficient inventory management and strong demand for products. A high days in inventory means that the company is taking longer to sell its inventory, indicating potential issues with inventory management or weak demand for products. High inventory levels can also tie up a company’s capital and be costly to maintain.
Monitoring inventory days of sales can help identify potential issues with inventory management, such as inefficient purchasing or production processes or a lack of proper forecasting.
Prerequisites for a Inventory, Days of
To calculate days in inventory, the following prerequisites are typically required:
- Cost of goods sold (COGS) information: This is the cost of the goods sold during a certain period of time, typically a year or a quarter.
- The average inventory level of a company at the beginning and end of a certain period of time.
Inventory days of sales = (average inventory/COGS)x 365 days
Use Case of Inventory, Days of
Suppose a retail store has a cost of goods sold of AU$500,000 for the past year and an average inventory of AU$50,000. They calculate the days in inventory by dividing 365 by the inventory turnover ratio (500,000 / 50,000 = 10). This means the store takes an average of 365 days / 10 = 36.5 days to sell its entire inventory.