What’s the story behind your inventory?
It can tell you much about your business, where you’ve been, and where you’re going. A long inventory turnover period could mean you have way too much product. A low inventory period could mean you’re failing to meet customer needs.
Inventory days tell you a story too. A small number of days in inventory could mean your business is agile and can respond to customer demand quickly. Conversely, a large number could indicate wasted time around sales and purchases.
What are inventory days, and why are they important? How to calculate inventory days? We’re here to tell you.
So, keep reading!
Understanding the Basics of Inventory Days Calculation
Inventory days are an important metric to understand in managing inventory. To calculate inventory days, the average inventory must be calculated first by taking the average of the inventory level at the beginning and the end of the period. Then, the number of days in the period must be determined.
Next, divide the average inventory amount by the average cost of goods sold to get the inventory days figure. This number can then indicate overall inventory management, as a high value reflects inefficient inventory management, while a low value indicates strong inventory management.
Determining an Accurate Average Inventory Days Amount
To determine an accurate average inventory days amount, one must first understand how to calculate inventory days. Inventory days measure the time it takes to sell goods in the inventory and the time it takes to replenish the goods.
First, calculate the average inventory amount over the measured period. Then take the cost of sales for that period and divide it by the average inventory amount.
Utilizing Re-Order Point Inventory Calculations
Inventory days calculation is an important part of utilizing Reorder Point Inventory Calculations. To calculate inventory days, one needs to know the lead time, which is the time it takes for a product to arrive at the warehouse; reorder point, which is the minimum quantity of a product in the warehouse mix; and the daily usage of a product.
Once these variables are identified, inventory days can be calculated by dividing the reorder point by the daily usage and adding it to the lead time.
Making Adjustments to Calculated Inventory Days
Inventory days is a metric used to measure the liquidity of a business’s inventory. This is done by dividing the number of days worth of inventory that the business has by the average daily cost of goods sold. Making adjustments to inventory days is important to ensure accuracy.
If sales are down, it likely necessitates a decrease in expected inventory by the same percent, and vice versa for increased sales. In addition, promotions, markdowns, and new products must all be accounted for to get an accurate inventory management reading.
Explore How to Calculate Inventory Days
To summarize, learning how to calculate inventory days can be done following simple steps: calculate inventory turnover, calculate average inventory, and calculate average day’s supply. The result will provide you with a valuable metric for stock management.
If required, you can adjust your order levels to ensure smooth operations and maintain the desired inventory level. Try it now and get an accurate understanding of your stock management.
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