This days in inventory calculator estimates the average number of days a company keeps its inventory goods until selling them. There is in depth information on how to asses a company’s inventory management below the form.
How does the days in inventory calculator work?
This accounting tool can help in assessing a company’s efficiency in the inventory management by measuring the average number of days it holds its inventory until the selling moment. It considers these figures:
- Cost of the sold items in a specific fiscal year;
- Beginning and ending inventory balance for the fiscal year in question.
The algorithm of this day in inventory calculator is based on the formulas presented here, while it returns the following results:
- Days in inventory = 365 / Inventory turnover ratio
- Inventory turnover ratio = Annual cost of the items sold / [(Beginning inventory balance + Ending inventory balance)/2]
- Total cost of the inventory sold during this fiscal year = Beginning balance + Cost of the sold items – Ending inventory balance
The interpretation of the days in inventory indicator
This indicator should be used to compare a company’s inventory management versus the average registered in a specific areaor with its own previous ratio to determine the evolution or the improvement.
The smaller the number of days in inventory is the better for the business. Also a downtrend may suggest that the entity is having a proper approach. Otherwise it may be a signal that the company is registering a decline in sales or that it expanded its inventory in a more pronounced trend in comparison to the sales figure.
Example of a result
For instance a company has an annual cost of sold goods of $50,000, while its beginning inventory balance is $10,000 and its inventory balance at the end of the fiscal year is $5,000:
■ Days in inventory: 55 days
■ Inventory turnover ratio: 6.67
■ Total value of the inventory sold during this fiscal year: $55,000.0017 Feb, 2015 | 0 comments