Days of inventory on hand is one of the more important inventory metrics you can use to determine whether or not your company is moving stock effectively. It can also help you diagnose stock problems. A good inventory solution app will include a days of inventory on hand figure in its inventory management feature.
Understanding Days of Inventory on Hand
In simple terms, days of inventory on hand refers to the average amount of time (in days) you hold inventory before it is sold. Whether you have a large inventory or a small one, whether you sell products in a brick and mortar shop or exclusively online, days of inventory on hand is a metric you cannot ignore.
This is because a high days of inventory on hand is a pretty good sign that your business is not selling the inventory fast enough. By contrast, a low days of inventory value can be a warning sign that you are about to run out of stock.
By monitoring your days of inventory on hand, you can spot inventory problems early on, before they affect your business’s day-to-day operations, helping you achieve a more productive inventory control as well as improve your inventory supply management.
Calculating Days of Inventory on Hand
To calculate days of inventory on hand you first have to know the cost of the goods you sell, as well as your average inventory. Let’s assume that the cost of goods for your small business is $250,000 and your average inventory is worth $150,000.
First, you have to divide the cost of goods sold by the average inventory, which is…
250,000 ÷ 150,000 = 1.666666667
Next, you have to divide the number of days in a year (365) by the result above:
365 ÷ 1.666666667 = 218.99 days
When looking at days of inventory on hand, it’s important to consider the type of business. For example, a 218.99 days of inventory on hand for a food company would be just terrible, but for a seller of water scooters it wouldn’t be that bad because its products are more expensive and sell better in some seasons than in others.
Days of inventory on hand is most helpful when it’s calculated for each product in your stock, preferably quarterly. Doing the math on your own, can be a big pain, but then you don’t have to. An advanced yet easy to use inventory solution app such as DataQlick automatically calculates days of inventory for every item in your stock, helping you better understand the performance of your inventory.
To learn more about the DataQlick inventory solution app as well as to improve your business knowledge, please have a look at the many resources on our blog, including this helpful article on pricey e-commerce business mistakes.
