Days in Inventory Formula

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Formula to Calculate Days in Inventory

Days in inventory tell you how many days it takes for a firm to convert its inventory into sales.

Let’s have a look at the formula given below.

Days in Inventory Formula = 365 / Inventory Turnover

As you can see that we need to know the inventory turnover ratio before days in inventory calculation; here's the formula of inventory turnover –

Inventory Turnover = Cost of Goods Sold / End Inventory

Now, the cost of goods sold can also be divided by the average inventory (the average of the beginning and the ending inventory) to find out the inventory turnover ratio.

Formula to Calculate Days in Inventory

Days in Inventory Example

Niti wants to know the inventory days of Company Him. Here are a few details she gathered –

The beginning and the ending inventories of the year are - $40,000 and $60,000, respectively.
The cost of goods sold is $300,000.
The year consists of 365 days.

Find out the Days in Inventory for Niti.

Here, first, we need to calculate the average inventory.

We know the beginning and the ending inventory of the year. Therefore, we will use a simple average to find out the average inventory of the year.

The average inventory of the year = (The beginning inventory + The ending inventory) / 2
Or, Average inventory of the year = ($40,000 + $60,000) / 2 = $100,000 / 2 = $50,000.

Now, we will find out the inventory turnover ratio.

Inventory turnover ratio = Cost of Goods Sold / Average Inventory = $300,000 / $50,000 = 6 times.
Therefore, the inventory days would be = 365 / 6 = 61 days (approx.)

Explanation of Days in Inventory Formula

It is used to see how long the firm takes to transform inventories into finished stocks.

Since a major part of the "days in inventory formula" includes the inventory turnover ratio, we need to understand the inventory turnover ratio to comprehend the meaning of the inventory days formula.

The inventory turnover ratio helps us understand the company's efficiency in handling the inventories. It shows how good the company is to reduce overspending on inventory and how well a company can convert the inventory into finished stocks.

For example, if a firm's inventory turnover ratio is 10, it turns inventory into finished stock ten times a year.

And here comes the value of inventory days formula.

If we consider that there are 365 days a year, we can see the days it takes for the firm to transform inventories into finished stocks. All we need to do is divide the number of days in a year by the inventory turnover ratio.

Extending the above example, we get = (365 days / 10 times) = 36.5 days in inventory to transform the inventory into finished stocks.

Uses

We can derive the formula for Days in Inventory by including the number of days of the year with the inventory turnover ratio.

If you ever want to know about the efficiency of inventory management of a firm, you should look at both – inventory turnover ratio and inventory days.

By finding out the inventory days, you would be able to calculate both of the above ratios.

Using the formula for days in inventory lets you know how much time a firm takes to manage and transform its inventory.