Business Inventory Days
What it is, how it’s calculated and why it’s important to small business owners.
Inventory Days = Inventory ÷ Cost of Goods Sold * 365
Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Inventory Days represents how many days inventory is on hold. To calculate Inventory Days, first calculate Inventory and Cost of Goods Sold. Inventory can be found on the balance sheet and COGS can be found on the income statement.
Calculate COGS by adding the value of all inventory at the beginning of the period to the value of all inventory purchased during the period and then subtracting the value of all inventory remaining at the end of the period. COGS is the cost of merchandise sold to customers whereas Inventory is the cost of merchandise purchased but not yet sold. To calculate inventory days, divide Inventory by COGS and then multiply by the number of days in the period (365).
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How it is Used
Calculating Inventory Days is helpful in determining how many days inventory is on hold. In order to reduce Inventory Days, it is important to understand metrics such as the Inventory Turnover Ratio. The Inventory Turnover Ratio describes how many times a business sells and replaces its inventory in a given period of time. If the ratio is low, the company is holding on to too much inventory because it is not selling fast enough.
Ways to Improve Inventory Days
Consider reducing the company’s operating cycle to increase the Inventory Turnover Ratio by finding new ways to get services and products more quickly to customers. Also, consider selling things that can quickly boost cash such as assets which are not producing sufficient income and cash flow.