The days in inventory formula calculates the ratio that is used to measure how fast a company transforms its inventory into sales. In other words, it’s a number of days that is needed for inventory to transform into cash.

Days in inventory or inventory days of supply measures how many times a year a company sells its inventory. This ratio used to see if a company has too much inventory in comparison to its sales. 

How to calculate days in inventory?

Days in inventory or inventory days is calculated by dividing the number of days in a year by the inventory turnover.

Days\;in\;inventory = \frac{365}{Inventory\;turnover}

How to calculate inventory turnover?

Inventory turnover is a ratio that shows how many times a company sold its inventory during a certain period of time (e.g. a year). Inventory turnover ratio is used to compare the sales level with how much inventory a company has.

There are a lot of ways to calculate inventory turnover. The basic way to calculate the inventory turnover is to divide sales by average inventory.

Inventory\;turnover = \frac{Sales}{Average\;inventory}

Average inventory is calculated as:

Average\;inventory = \frac{Starting\;inventory + Ending\;inventory}{2}

For simplicity, you can use just the ending inventory.

You can also derive inventory turnover by dividing the cost of sold goods by average inventory.

Inventory\;turnover = \frac{Cost\;of\;goods\;sold}{Average\;inventory}

Why days in inventory ratio is important?

If days in turnover ratio is low, that may be caused by internal reasons like overstocking (excess amount of inventory in storage) and bad marketing strategy or external reasons like a market downturn. This leads to financial losses because a company will have to sell these products on sale or will keep them in its warehouse for too long which causes higher holding costs. 

If the days in inventory ratio level is high, it can be a sign of either strong sales or too low inventory levels, which also may lead to financial losses.

In some cases, low days in inventory can be a good thing, e.g. when a company expects rapid prices change or market shortages.

It’s also important to compare days in inventory of companies in the same industry. Some industries naturally have higher or lower days in inventory levels. For example, a bakery sells fast-moving goods that expire really fast, real estate developers, on the over hand, have very low days in inventory levels.

An item of inventory which is sold more times a year has a lower cost than the same item sold fewer times. This happens due to:

  • Stock purchasing. If a company buys a certain amount of inventory it will have to cell at least the same amount of inventory to have a better turnover ratio, income, and profitability. If it doesn’t sell this amount, it will have to keep more inventory in the warehouse and therefore it will incur holding costs. The more the items turn over, the lower are the holding costs such as rent, utilities, insurance, salaries and so on.
  • Faster reaction to changes. If items are sold more times a year a company can react to changes on the market. It’s especially important in fast fashion industry where reacting to rapidly changing trends is one of the most important goals.

Example of days in inventory calculation

Let’s assume XYZ company has $600,000 of sales. XYZ’s beginning inventory was worth $160,000, by the end of the year, this number decreased to $140,000. Cost of goods sold during this year is $150,000. XYZ’s days in inventory is calculated as:

  • Sales $600,000
  • Beginning inventory $160,000
  • Ending inventory $140,000
  • Cost of goods sold $150,000

Step 1. Average inventory

Average\;inventory = \frac{16,000 + 14,000}{2} = \$15,000

Step 2. Inventory turnover (sales method)

Inventory\;turnover = \frac{600,000}{150,000} = 2

Step 3. Days in inventory

Days\;in\;inventory = \frac{365}{4} = 91.25

XYZ’s days in inventory ratio is 91.25, which means the inventory was sold and replaced ~ 91 times.