How to calculate inventory days with a formula
The formula to calculate inventory days is simple, but the insight it can give you into your business and inventory management can be valuable. In this guide, you'll learn the definition of inventory days, a formula for calculating it, and why it's an essential metric to optimise your inventory management.
What are inventory days?
Inventory days metrics, also known as inventory days on hand, or days sales in inventory, help businesses predict how long their stock will last. An accurate inventory days calculation will help reduce inventory costs while avoiding stockouts and overstocking.
Why is calculating inventory days important?
Inventory days help you forecast ideal inventory levels, to uphold sales and maintain cash flow. If your inventory days creep up, it could mean sales are slowing or you're over-ordering. Lowering your inventory days means you're getting closer to just-in-time ordering, meaning you hold the stock you need to fulfil orders without tying up too much cash in inventory or storage costs.
What are the key use cases for inventory days?
You can use your inventory days metric to calculate other key metrics, improving your stock control:
Working capital management
You'll need to understand your inventory days metric to calculate your working capital cycle – that is, how long it takes to turn your inventory into cash. It's one way to measure your overall efficiency and helps you see where you can improve.
You'll also need an accurate inventory days metric to predict factors that could increase or decrease demand. With a mix of statistical analysis and your business experience, you can make better decisions about the future of your company – not just regarding inventory but with factors like staffing levels, product offering, preferred suppliers and marketing activities.
With good inventory forecasting, you'll be more likely to have the items when needed and minimise the risk of being left with obsolete or unsellable stock. To achieve this, you'll need to know your inventory days and other metrics, such as economic ordering quantity, carrying costs and others.
How to calculate inventory days (formula)
To calculate inventory days for your business, divide your cost of goods sold (COGS) by 365 days. Then, divide your average inventory value by that number.
Inventory days = average inventory/ (COGS / 365)
Real-world example of inventory days
Here's a real-world example of calculating inventory days:
Suppose you sell toys. While your inventory went up and down during 2023, the average value was $20,000. Your average yearly cost of goods sold (COGS) was $320,000, which you divide by 365. This gives you 876.7. So you divide your inventory value ($20,000) by 876.7. This means you have, on average, 22.8 days of inventory on hand. Here's how the formula would look:
22.8 inventory days = 20,000/ (320000/365)
Risks of high inventory days
High inventory days indicate you're more at risk of being left with dead stock or obsolete inventory and losing money on your investment. Keeping your inventory days as low as possible reduces this risk, especially if your industry is significantly impacted by shifting fashions and consumer preferences.
Risks of low inventory days
Keep your inventory days too low though, and you may risk stockouts. In the short term, a stockout means you lose sales, but if it happens regularly it’ll affect customer satisfaction and loyalty, causing longer-term business damage.
Inventory days FAQs
What is the right number of inventory days for a business?
A good inventory days number may sit between 30 and 60 days, but this varies significantly between industries and businesses. For example, if you sell perishable goods like food or flowers, you'd want much lower inventory days so you're not left with spoiled stock. Higher inventory days may suit industries that aren't much affected by trends or where lead times have increased.
What are good ways to reduce inventory days?
The best way to reduce inventory days is to take control of your inventory management. You can take action to streamline your supply chain, adjust your pricing, sales and marketing to sell more items faster, and improve demand forecasting to tweak your range. Adding automation to your inventory process can also minimise errors and time spent on administrative tasks.
What are good ways to increase inventory days?
While lower inventory days are generally preferable, if you feel you're at risk of stockouts, you may want to increase your inventory days. To do this, order more items at a time or place orders more frequently.
What is the difference between inventory days and inventory turnover?
Inventory days and inventory turnover are very similar measurements. Inventory turnover shows how fast you sell and replace all your stock. Inventory days tell you when you might run out of stock. The figures should be inverse. If your inventory days metric is low, your inventory turnover should be high, and vice versa.
Optimise your inventory and your business
Understanding your inventory days can help you optimise inventory management to reduce costs and avoid stockouts and overstocking. MYOB is a business management platform that integrates inventory management with your accounting software, so you have the insights you need to run your business accurately and efficiently.
With advanced reporting on key inventory metrics, you can streamline your processes and make informed decisions to boost your bottom line. Check out MYOB plans and features and start your free 30-day trial now.
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