What is Inventory On Hand?
The inventory on hand formula measures how many days it takes a company to sell its inventory stock. The lower the number of inventory days, the better it is for a company.
Significance of Inventory On Hand Formula
With the fluctuating demand for goods, managing inventory becomes the most vital operation for any company. Here are some significant reasons for the inventory days on hand formula:
- Low expenses: With lower inventory days on hand, the company has lower expenses on warehousing and storage.
- Incrementing profits: Decreasing inventory days on hand implies faster shipment of goods from the warehousing. It lowers the carrying cost and increases the profit.
- Appropriate stock: Determining the appropriate value of inventory days lets the company keep an ordered and categorized stock.
Application of Inventory on Hand Formula
- Inventory on hand formula helps in proper and effective inventory control and proper inventory management. You have a clear idea of the precise information about the inventory levels and prevent stockouts.
- Due to its significance on the limited days an inventory remains in stock, it provides a clear picture of the inventory liquidity of the company. The more liquid a business is, the higher the cash flow and returns.
Inventory on Hand Formula
- Average inventory estimates the amount of goods a company stores within a specific time period.
- Cost of goods sold (COGS) refers to the total expenditure incurred by the company on goods, including modifications and purchases.
Understand With an Example
If a company has an average inventory of AUD1,00,000 and the COGS in the last 365 has been AUD3,00,000. Then the calculation would be as follows:
= (100000/300000) x 365
= 121.6 days of inventory on hand
Inventory on hand formula is used for inventory management, avoiding stockouts, and increasing profits.