How to Calculate Days in Inventory: A Step-by-Step Guide for Businesses

Knowing your days in inventory metric is crucial for managing your inventory efficiently and optimizing your cash flow. But what exactly is days in inventory and how do you calculate it?

In this comprehensive guide, we’ll explain what days in inventory means, why it matters, and walk through the step-by-step calculation using examples. We’ll also look at how to analyze and use your days in inventory number to improve inventory management.

What is Days in Inventory?

Days in inventory refers to the average number of days a business holds its inventory before selling it It measures how many days a business’s current average inventory will last based on its cost of goods sold.

In simple terms, days in inventory shows how long products sit in your warehouse or store before being sold. A lower days in inventory indicates you are selling inventory faster, while a higher number means it’s taking longer to sell inventory

Days in inventory is an important metric because it reveals how efficiently you are managing inventory. Holding on to excess inventory ties up your cash and capital. Plus expired or obsolete stock can lead to write downs. So optimizing your days in inventory improves working capital and frees up cash.

To calculate days in inventory, you need data from your financial statements – cost of goods sold and average inventory value. We’ll explain how to determine these figures and do the calculation in the next sections.

Why Track Days in Inventory?

Monitoring your days in inventory provides valuable insights into your inventory management. Here are some key reasons businesses should track this important metric:

• Measure inventory efficiency: Days in inventory shows how fast you are selling through inventory. A high number indicates excess stock levels tying up cash.

• Identify trends: Comparing days in inventory over time spots trends and seasonal patterns. This helps forecast optimal inventory levels.

• Benchmark performance: Compare your days in inventory to competitors or industry averages to assess operational efficiency.

• Improve cash flow: Reducing excess inventory improves turns and frees up working capital. This strengthens cash flow.

• Reduce write downs: Excess inventory can lead to write downs from obsolescence and expiration. Managing days in inventory helps minimize this.

How to Calculate Days in Inventory in 5 Steps

Now let’s go through the 5 step process to calculate days in inventory:

Step 1: Determine the Time Period

First, determine the time period you want to calculate days in inventory for. This is usually your accounting period – which could be a month, quarter or year.

For example, if you want to determine your monthly days in inventory, you would use the month’s cost of goods sold and average inventory.

Step 2: Calculate Cost of Goods Sold

Cost of goods sold (COGS) is the direct costs attributed to the production or procurement of the products sold during a period. It includes:

• For manufacturers: direct material costs, direct labor costs, and factory overheads.

• For retailers: the purchase price of merchandise sold to customers.

COGS can be calculated directly from your income statement. Or use the formula:

COGS = Beginning Inventory + Purchases - Ending Inventory

So if beginning inventory was $100,000, plus purchases of $150,000, minus ending inventory of $60,000, the COGS would be $190,000.

Step 3: Determine the Average Inventory

Average inventory is the mean value of your inventory during the period. It smooths out fluctuations in inventory levels over the time period.

To find average inventory, use this formula:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

For example, if beginning inventory was $100,000 and ending inventory was $60,000, the average is ($100,000 + $60,000) / 2 = $80,000.

Step 4: Calculate the Days in the Period

How many days are in the time period you are measuring? Usually this is:

• 30 days for a month
• 90 days for a quarter
• 365 days for a year

Step 5: Apply the Days in Inventory Formula

Finally, calculate days in inventory with this formula:

Days in Inventory = Days in Period / (COGS/Average Inventory) 

Plug in the numbers from the steps above:

Days in Inventory = 365 / ($190,000/$80,000) = 160 days

So based on a COGS of $190,000 and average inventory of $80,000, this business has 160 days in inventory for the year.

And that’s it! By following these 5 steps you can easily calculate your business’s days in inventory. Now let’s look at how to interpret and apply this important metric.

How to Analyze and Apply Your Days in Inventory Metric

Once you’ve calculated your days in inventory, you need to analyze what it means and how you can apply it to improve inventory management. Here are some tips:

• Compare to past periods – Look at trends in your days in inventory over the last several months or years. Is it increasing or decreasing? This helps identify issues.

• Benchmark against competitors – Research typical days in inventory for your industry. Compare to see if your metric indicates an issue.

• Set goals to reduce days – Develop goals, like cutting days in inventory by 10% yearly. Continual reduction improves working capital.

• Identify slow-moving inventory – High days in inventory could mean poor sales of some stock. Analyze your SKUs to find and dispose of dead stock.

• Right size inventory – Size inventory orders based on sales velocity and days in inventory targets to avoid excess stock.

• Improve procurement practices – Negotiate better deals with suppliers and reduce lead times to improve turns.

• Optimize stock control – Use inventory control methods like ABC analysis to tightly manage stock levels.

Key Takeaways on Calculating Days in Inventory

• Days in inventory shows how many days a business holds its average inventory before it is sold.

• It is calculated by dividing average inventory by cost of goods sold, then multiplying by days in the period.

• Lower days in inventory indicates faster selling inventory and tighter stock management.

• Tracking this metric helps identify issues with slow turnover, excess stock and cash tied up in inventory.

• Addressing high days in inventory improves inventory turns, cash flow and working capital for a business.

So in your business, stay on top of days in inventory as a vital indicator of inventory performance and cash flow efficiency. Use the steps outlined here to accurately calculate it and take action if days in inventory gets too high. Tight inventory management will improve your cash position and bottom line.