Managing inventory is very important in a company that sells products to make a profit. Calculating inventory days is an indicator of how well the business is doing in terms of inventory. It involves determining the cost of goods sold and average inventory in a given period. In most cases, an inventory turnover ratio is calculated to measure the performance of overall inventory and to find out how the company is meeting product demands.
1Determine the amount of cost of goods sold for the period. You can find this amount on the income statement.
- Assume you have the amount of $550,000 for cost of goods sold.
2Determine the amount of average inventory for the period. You can find this amount on the balance sheet.
- Add the beginning inventory (or inventory at the beginning of a given period, usually 1 year) to the ending inventory (or inventory at the end of a given period).
- Assume you have a beginning inventory of 275,000 and ending inventory of 350,000. Add 275,000 and 350,000 and divide it by 2. That would be:
- 275,000 + 350,000 = 625,000
- 625,000 divided by 2
- Your average inventory is 312,500
3Calculate the inventory days using the following formula:
- Inventory Days = 365 x (Average Inventory / Cost of Goods Sold)
- 365 x (312,500 / 550,000)
- 365 x 0.5681818
- You have 207.38 days in inventory
4Calculate the inventory days by using another formula. First, you would have to determine the inventory turnover. Inventory turnover ratio shows how many times your inventory is being turned over per year.
- To get the inventory turnover ratio, you need to divide the cost of goods sold by the average inventory using this formula:
- Inventory Turnover = Cost of goods sold / Average Inventory
- Using the same example above, calculate the inventory turnover.
- Inventory Turnover = 550,000 / 312,500
- Your inventory turnover is 1.76
- Then, divide the number of days in a period by the inventory turnover ratio. In this case, the period is 1 year. So that would be 365 days.
- 365 / 1.76 = 207.38
- You will get the same number of inventory days of 207.38.
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- The higher the ratio of inventory turnover, the better the performance of your overall inventory is.
- Inventory turnover varies depending on the industry, so make sure you benchmark yours against the data of your competitors in the same industry.
- When the inventory turnover ratio is low, this may indicate that the company does not keep or does not have enough stock on hand to meet product demands.
- When inventory days are high, this may indicate that there is less demand for the goods being sold.
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