How To Calculate Days in Inventory (With 3 Examples)
By Indeed Editorial Team
Updated June 6, 2022 | Published January 22, 2021
Updated June 6, 2022
Published January 22, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Calculating the days in inventory tells you how quickly a company can sell its inventory for money. If you're looking for a job in finance or accounting, being familiar with how to calculate days in inventory can give you skills to succeed in the field, like knowing formulas and how to analyze results.
In this article, we explore how to calculate days in inventory and discuss why it's important.
Days in inventory is the average time a company keeps its inventory before it is sold.
To calculate days in inventory, divide the cost of average inventory by the cost of goods sold, and multiply that by the period length, which is usually 365 days.
Calculating days in inventory can help show whether a company is operating efficiently or not.
What is days in inventory?
Days in inventory is the average time a company keeps its inventory before they sell it. Some organizations call it days inventory outstanding or inventory days of supply. Finding a company's days in inventory can tell you about its efficiency in terms of operations and finances, as it shows how rapidly a company can sell its inventory.
A low days in inventory figure can indicate that the company is exchanging its products for cash quickly and that they're operating efficiently. If a company finds that its conversion through sales is slow, this can show which areas might need additional help, such as building or revising a brand image or adapting to changes in the industry.
How to calculate days in inventory
You can calculate days in inventory with this formula:
Days in Inventory = (Average Inventory / Cost of Goods Sold) x Period Length
To calculate days in inventory, you need these details:
Period length: Period length refers to the amount of time you want to calculate the days in inventory for. This number is often 365 for the number of days in one year.
Average inventory: Average inventory is the number of units a company typically holds in inventory.
Cost of goods sold: Cost of goods sold is the money required to produce the products in a company's inventory.
Related: How To Track Inventory
What is inventory turnover ratio?
Inventory turnover describes any products that a company sells and then replaces. The turnover ratio measures how efficiently a company sells its inventory. A high inventory turnover indicates that a company is selling its inventory at a fast pace and that there's a market demand for its product.
To calculate inventory ratio, you can divide the cost of goods sold by the average inventory for the same period using this formula
Inventory Turnover Ratio = Cost of Goods Sold / Inventory
5 steps to calculate days in inventory
Here are five steps for calculating days in inventory:
1. Find the average inventory
Determine the average inventory for the company you want to calculate days in inventory for. To find the average inventory, add the value for the number of inventory units a company has at the beginning of the period to the value of inventory units at the end of the period. Then, divide that number by two to find the average.
For example, if Pet Food Solutions begins the year with $12,000 of inventory and ends the year with $8,000 of inventory, their average inventory is $10,000.
2. Calculate the cost of goods sold
To determine the cost of goods sold, add the value of inventory held at the beginning of the period to the cost of goods. This can include the cost of materials, labor and anything else that the company pays for in order to manufacture their goods. Then, subtract the value of inventory held at the end of the period you're measuring.
In the example with Pet Food Solutions, if the company has a cost of goods of $3,000, the calculation can read ($12,000 + $3,000) - $8,000. Therefore, the cost of goods sold is $7,000.
3. Determine the period length
Choose the length of the period you want to find the days in inventory for. Whichever period you decide to evaluate, you should represent the period length as a number of days. For example, if you want to consider a period of two months from March through April, your period length would be 61.
For the example of Pet Food Solutions, the period length is one year, so you'll represent this value as 365.
4. Divide the average inventory by the cost of goods sold
Take the value of average inventory and divide it by the cost of goods sold to complete the first part of the two-step formula for days in inventory.
Considering Pet Food Solutions as an example, this part of the calculation should divide $10,000, the average inventory, by $7,000, the cost of goods sold. This results in a figure of 1.43, rounded to the nearest hundredth.
5. Multiply the results by the number of days in the period
Use the result of dividing the average inventory by the cost of goods sold to find the days in inventory by multiplying it by the number of days in the period you're examining.
Because the period for the Pet Food Solutions example is one year, you can multiply 365 by the result from the previous step, which is 1.43. Therefore, the days in inventory for Pet Food Solutions equals 521.95 days. Because this is a high result, Pet Food Solutions can use the information to improve its operations.
3 examples of calculating days in inventory
Here are some examples of calculating days in inventory:
All Smiles Dental Suppliers sells dental supplies to practices in its area. The company has an average inventory of $1,000 and a cost of goods sold of $40,000 for the year. What is its days in inventory result for a one-year period?
To find the days in inventory, you can use the formula ($1,000 / $40,000) x 365. As a result, the days in inventory is 9.13 days. This is a low result, which indicates that All Smiles Dental Suppliers is operating efficiently within its market and maintaining its finances well.
Robert's Repairs offers repair services and sells spare parts to mechanics. Its average inventory is $5,000, and its cost of goods sold for the year is $71,000. What is its days in inventory result for a one-year period?
To find the days in inventory, you can use the formula ($5,000 / $71,000) x 365. This calculation shows the days in inventory for Robert's Repairs is 25.7 days. The company can see this as a low result, meaning Robert's Repairs is efficiently operating and monitoring its finances.
Green Grocer is a grocery store that provides organic food products for its small town. The average inventory for the year is $2,000, and the cost of goods sold is $20,000. What is the store’s number of days in inventory for a one-year period?
To find the days in inventory, you can use the formula ($2,000 / $20,000) x 365. The results indicate the days in inventory for Green Grocer is 36.5. For a grocery store, this number of days in inventory might be high, so executives at Green Grocer know they can adapt their operations to be more efficient in terms of operations and finances.
Explore more articles
- FAQ: How Does Webchat Work? (And How To Implement It)
- A Guide to Negative vs. Positive Feedback Loops in Business
- FAQ: How Do You Choose Between a Flyer vs. Brochure?
- 33 Screenwriting Programs (With Key Features)
- How To Write an Accountant Reference Letter (With Tips)
- Steps for Recruiting Quality Candidates To Startups
- What is Lean Management? Definition and Benefits
- How To Be a Good Executive Sponsor in 6 Steps
- 11 Tactful Ways To Challenge Your Boss
- How To Get Verified on YouTube: Definition, Steps and Tips
- 10 Degrees in Functional Medicine (With Benefits)
- What Is a Transitional Leader? (Plus Why They're Important)