Days Inventory on Hand Ratio

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Examples

Example 1:
Calculate the days' inventory for Kaiseri Kitchen Supply, when:

• Annual inventory turnover ratio =13.5 for the year
• Number of days in the period = 365
• Days’ inventory ratio = days in time period ÷ turnover ratio = 365 days ÷ 13.5 times/365 days = 27 days

Example 2:
Calculate the quarterly days' sales in inventory ratio for Jerry’s Produce when:

• Beginning Inventory = \$213,000
• Ending Inventory = \$265,000
• Quarterly sales value of inventory \$5,712,000
• Calculate the average inventory value = (beginning value – ending value) ÷ 2 = (\$265,000 + \$213,00) ÷ 2 = \$478,000 ÷ 2 = \$239,000
• Calculate days in reporting period = 365.25/4 = 91
• Calculate days’ sales in inventory = (239,000 ÷ 5,712,000) × 91 = 3.8 days

Overview

Days' inventory (also called days' sales in inventory or simply days of inventory) measures how efficiently a business manages its inventory. This ratio calculates the average number of days the company holds its inventory before selling it. When Inventory turnover is used to calculate days’ inventory values, it indicates the number of times a business will sell (turn over) the average inventory value during a time period (often a year).

Factoring and asset-based financing companies convert the value of a company’s inventory and accounts receivable into ready cash and working capital. This makes the total value of a company’s inventory and the pace at which it is sold important indicators of a company’s attractiveness as a customer. Ideally, a business working with an asset-based finance company would have a healthy average inventory value and a low days’ inventory ratio (rapid sales).

Analysis

A low days’ inventory value is generally considered more desirable than a higher one. However, too low a value can indicate trouble with inventory management. Very rapid sales (a very low ratio value) might indicate a company having difficulty in satisfying demand for goods and services. Although a low value is generally a favorable indicator, a company with a low value might pay opportunity costs for lost sales.

In all cases, the ratio value should be viewed within the context of a company’s industry. The significance of low or high ratio values varies a lot between different industries. Asset-based finance companies might view two companies with the same ratio value very differently and look to other indicators to provide a more complete picture of customer company health.

Formula

Days of Inventory = Number of days in reporting period Value of inventory turned over during reporting period (\$/day)