Inventory Days

What is the Inventory Days Ratio?

The inventory days ratio or days in inventory ratio shows the average number of days sales a business is holding in its inventory. It is calculated by dividing inventory by average daily cost of goods sold. It is sometimes called the stock days ratio.

What is the formula for Inventory Days Ratio?

Inventory Days = Average inventory / (Cost of goods sold / 365)
  • Inventory is the average of the opening and closing inventory given in the balance sheet and is normally under the heading inventory or stock.
  • Cost of goods sold is found in the income statement.

How is the Inventory Days Ratio calculated in practice?

1. Cost of Goods Sold from the Income Statement
Revenue 440,000
Cost of goods sold 176,000
Gross margin 264,000
Operating expenses 135,000
EBITDA 129,000
Depreciation 65,000
Interest 20,000
Earnings before tax 44,000
Tax 9,000
Net income 35,000
2. Capital Employed from the Balance Sheet
Cash 5,000
Accounts receivable 125,000
Inventories 20,000
Current assets 150,000
Property 390,000
Fixed assets 390,000
Total assets 540,000
Accounts payable 70,000
Other liabilities 30,000
Bank overdraft 20,000
Current liabilities 120,000
Long term debt 190,000
Total liabilities 310,000
Capital 60,000
Retained earnings 170,000
Total equity 230,000
Total liabilities and equity 540,000

In the example above the cost of goods sold is 176,000 and ending inventory is 20,000. As the opening inventory is not available, the ending inventory is used, and the inventory days is calculated as follows:

Inventory days = Inventory / (Cost of goods sold / 365)
Inventory days = 20,000 / (176,000 / 365) = 41 days

The business on average is holding 41 days of sales in its inventory.

This in theory means that if production or supplies stopped then the business would run out of inventory after 41 days. In practice it is unlikely that demand would exactly match the items in inventory.

If you are using cost of goods sold for a different period then replace the 365 with the number of days in the management accounting period.

For example, if using monthly (30 days) management accounts
Monthly cost of goods sold 14,000 and month end inventory 15,000 then
Inventory Days Ratio = 15,000 / (14,000 / 30) =  32 days

What does the Days in Inventory Ratio show?

Inventory days is a measure of the efficiency of the inventory policies of the business. If your days in inventory are increasing it indicates that the business is building up inventory and an increasing amount of cash (possibly overdrafts) is being tied up.

Any downward trend in the inventory days ratio means that inventory levels are being kept under control in relation to the level of sales. However, care must be taken not to let the inventory days ratio fall too low as this may eventually result in inventory shortages as demand fluctuates.

Useful tips for Inventory Turnover Days Interpretation

  • The days of inventory on hand will vary from industry to industry. To make comparisons you need to use a comparable business operating in your sector.
  • The days in inventory should be a low as possible without causing inventory shortages. It is generally accepted that money tied up in inventory earns very little or nothing for the business.
  • Typical ranges for the days in inventory ratio would be 30-60 days.

Relationship to Inventory Turnover Ratio

The inventory days calculation is linked to the inventory turnover ratio by the following formula.

Inventory Days = 365 / Inventory turnover ratio
Inventory Days May 23rd, 2017Team

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