Days Sales In Inventory / Stock Holding Ratio (Average Age of Inventory) | Explained with Example
How to calculate days sales in inventory
The formula for figuring days sales in inventory is as follows:
DSI = (ending inventory/cost of goods sold) x 365
COGS equals starting inventory plus any purchases made during a period minus ending inventory.
This metric aids businesses in understanding their overall efficiency and gross profit for a specific time frame.
Many businesses calculate the DSI for a fiscal year using 365 days. However, some companies may decide to use 90 days per quarter or 360 days per fiscal year. Choose the number that best fits your companys needs.
What are days sales in inventory?
DSI is an important part of inventory management. Companies want their inventory to move quickly so they can use the proceeds for other operational costs. Additionally, they desire quick inventory turnover so that the stock doesn’t lose its usability or value. Additionally, DSI alerts them to the possibility of new inventory requirements, particularly during periods of seasonal high sales.
Typically, a lower DSI is preferred as it indicates a quicker time to clear inventory. A high DSI could mean that a company is not managing its inventory effectively or that its inventory is challenging to sell. However, depending on elements like product type and business model, the typical preferred DSI varies by industry.
Other benefits of a DSI report include that it:
For retail businesses and other companies that sell tangible goods, an accurate DSI is especially crucial. Managers can use DSI calculations to determine the inventory turnover rate and make adjustments as needed to boost sales and manage inventory more effectively.
Examples of days sales inventory
Here are examples of days sales inventory:
How to interpret days sales in inventory calculations
You can follow these steps to analyze the outcomes of your inventory calculations based on your days’ sales:
1. Look at your companys cash conversion cycle
2. Assess the number of days in inventory
You will be able to see your company’s number of days in inventory rate once you have finished the DSI calculation. This rate demonstrates how long your company keeps its inventory on hand and how long cash is held in inventory. You are more likely to lose money on that inventory if your days in inventory rate is higher. Additionally, longer days in stock can lower your profitability in the eyes of creditors and investors, as well as your overall return on investment.
3. Compare your businesss DSI to other companies in your industry
Comparing your DSI reports to those of other businesses in your industry will help you better understand the findings. This helps you gain a better understanding of your company’s inventory management efficiency and where you stand in your industry. Additionally, you can assess your overall improvement rates and any trends that might be affecting your cash conversion cycle by comparing your DSI to your company’s prior DSIs from prior years.
It’s crucial to remember that DSIs can differ greatly between industries. You can gain a better understanding of where your company stands by learning what is considered an efficient DSI in your industry and what the average DSI is for that sector. A company’s product line and business strategy can have an impact on its DSI and how it should be interpreted.
Example 1
An illustration of how to calculate a day’s sales in inventory is as follows:
For its most recent fiscal year, Marthas Furniture Store wishes to perform a days sales in inventory. According to records, the company had a $60,000 ending inventory and a $150,000 cost of goods sold. The company calculated its DSI as follows:
60,000/150,000 x 365 = 146.
According to this calculation, Martha’s DSI ratio is 146, which indicates that the company typically converted its inventory into cash in 146 days or that its inventory will last on average 146 days. In the furniture industry, this ratio is considered good.
Example 2
The average inventory at ABC Widgets is $1 million, and their annual cost of goods sold is $6 million. It calculates its DIS as:
$1 million/$6 million x 365 = 60.8.
This shows that ABC Widgets’ DIS is 60. 8 means that it sells through its inventory of widgets in about two months. This ratio may be high in comparison to other widget manufacturers. Investors might question the company’s overall value and management.
FAQ
How do you calculate days sales in inventory?
The inventory balance (including work-in-progress) is divided by the amount of cost of goods sold to determine the DSI value. The subsequent step is to multiply the number by the quantity of days in a year, quarter, or month.
Should days sales in inventory be high or low?
While there may not be a single ideal DSI, businesses typically strive to maintain low days sales in inventory. Inventory is selling more quickly when the DSI is lower, which is typically more profitable than the alternative.
