Days in inventory is a measurement of a company's efficiency in selling through its product inventory. To calculate days in inventory, you must first compute your company's inventory turnover rate, which is turnover for a given period.
Calculate Inventory Turnover
The formula for inventory turnover is costs of goods sold divided by average inventory during a given period. Average inventory is your beginning inventory plus your ending inventory, divided by two. If your inventory balance starts at $150,000 and ends at $200,000, you divide $350,000 by two to identify the average inventory balance of $175,000.
Divide COGS by $175,000. If COGS for a year were $700,000, this amount divided by $175,000 equals four. Therefore, the business had an inventory turnover ratio of four, which means it turned over its inventory four times during the year.
Convert to Days in Inventory
After you identify the number of inventory turns on an annual basis, the formula to convert the turns into days is relatively simple. You divide 365 days in a year by the inventory turnover ratio.
Using the turnover ratio of four, you divide 365 days by four annual turns. In this case, the result is 91.25 days. The business turns over its average inventory every 91.25 days.
The shorter your inventory turnover the better, as it helps minimize your inventory management costs. Typical days to turn inventory vary by industry. The best way to gauge your inventory turnover efficiency is to compare it to the industry average. If your turnover is below average, it typically means your sales are poor, which creates excess inventory. Effective marketing and just-in-time orders are among the strategies to keep inventory turning at the right pace.
Significant accounting changes, such as allocating direct labor or materials to inventory costs, can dramatically change inventory turnover from one period to the next.