Consequently, as an investor, you want to see an uptrend across the years of inventory turnover ratio and a downtrend for inventory days. In this article, you are going to learn how current ratio to calculate inventory turnover and inventory days. You will find the answer to the next four questions and a real example to understand the interpretation of this ratio better.

Inventory software can help companies accurately track inventory levels, demand, and sales trends, enabling proactive inventory management strategies to optimize inventory levels and reduce excess inventory. It can help reduce lead times, improve order accuracy, and ensure timely replenishment, all of which can improve IDO. Interpreting inventory days on hand results requires considering the specific context of the business, industry benchmarks, historical data, and inventory management strategy.

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We’ll assume the average inventory days of our company’s industry peer group is 30 days, which we’ll set as our final year assumption in 2027. Like earlier, a step function is used to incrementally reduce our assumption from 35 days at the end of 2022 to our target 30-day assumption by the end of 2027, which implies a decline of approximately one day per year. Let’s look at an example to illustrate how this formula might be used to calculate inventory days on hand.

• With the right inventory management software, merchants can set up automatic reorder point notifications when SKU levels reach certain thresholds, which enables you to reorder inventory at just the right time.
• On the other hand, if a product has a low DOH, it may be time to ramp up production.
• This second formula is essentially the percentage of the products that sold in terms of cost of products sold.
• But the COGS value could also be obtained from the annual financial statement.
• To lower your DII, you could increase your rate of sales or reduce your amount of excess stock.

All of these features can help you decrease your DOH and keep reduced inventory levels without sacrificing customer service. Contact us today to learn more about how Katana can help your business streamline its inventory management with comprehensive ERP solutions. Say your company sells electronics, and your average inventory value is $100,000.

Your company’s DII tells you how long it will take you to sell a given amount of inventory. As a ratio between your average inventory size and your rate of sales, it can additionally help you see if these numbers are healthy in relation to one another. The fewer inventory days on hand you have, the less capital you’ll have tied up in physical inventory, and the less money you’ll need to spend on warehousing and holding costs.

What is “days in inventory” (DII)?

Plus, analyzing these details can help prevent theft of obsolescence, increase cash flow, and reduce costs. A retail corporation, such as an apparel company, is a good example of a company that uses the sales of inventory ratio to determine the cost of inventory. Accurate demand forecasting enables a company to better align its inventory levels with actual customer demand, leading to optimized inventory management and improved IDO.

What is the relationship between the inventory turnover and the number of days inventory on hand?

ShipBob makes it easy to take a data-driven approach to inventory distribution. By aggregating historical order data, you get an analysis of which fulfillment centers you should stock to best leverage ShipBob’s network of fulfillment centers for the most cost-effective and fast deliveries. ShipBob ecommerce fulfillment services for online brands of all sizes, taking the hassle out of storing, picking, packing, and shipping your products. ShipBob lets you focus on creating and selling great products — we’ll handle the rest. Without getting accurate projections, you may experience many canceled or delayed orders and angry customers — which can then turn into negative reviews and feedback for your business.

If you have a high DOH, you likely have dusty inventory on your shelves and a low inventory turnover rate. A low DOH indicates you’re being efficient with how you purchase, store and sell your stock. When you get a new shipment of inventory, you’re selling through it at a rate fast enough that you don’t have a backlog of stock building up with every new shipment. By computing the Days of Inventory on Hand, a company is able to know just how long its cash remains tied up in its stock. Ideally, it means that the company is using its inventory more efficiently and frequently, which can result in potentially higher profit.

Stockouts occur when a company runs out of inventory, resulting in unfulfilled customer orders and lost sales. By analyzing IDO, a company can determine the optimal inventory level to hold to meet customer demand without excessive stockouts. Maintaining an appropriate IDO can help a company avoid stockouts by replenishing inventory on time and preventing prolonged stockouts. When a company maintains an appropriate IDO, it means that inventory is turning over efficiently and is not held for longer periods. It allows for faster conversion of inventory into sales, which can result in faster cash inflows.

Assuming a company has an average inventory of 50,000 and a cost of goods sold of 500,000 for a given period, we want to calculate the inventory days on hand. Inventory Days on Hand (IDO), or Days Sales of Inventory (DSI), is a financial metric measuring the average number of days a company’s inventory is expected to last based on its average daily sales. It provides insight into how efficiently a company is managing its inventory levels by indicating how long it takes, on average, to sell through its existing inventory. Now that you know how to calculate your inventory days on hand, you’re one step closer to becoming an inventory management master. In other words, the DOH is found by dividing the average stock by the cost of goods sold and then multiplying the figure by the number of days in that accounting period.

Days Sales of Inventory (DSI) Formula and Calculation

When demand forecasting is accurate, inventory levels can be optimized, resulting in an appropriate IDO that minimizes excess inventory and stockouts. It can help reduce holding costs, increase inventory turnover, and improve cash flow. However, inaccurate demand forecasting can lead to stockouts or excess inventory, resulting in suboptimal IDO. DSI is also known as the average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory, or days inventory and is interpreted in multiple ways. Indicating the liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last.

To calculate using the first method, we would take our average inventory ($100,000) and divide it by our cost of goods sold ($80,000). Based on its average daily sales, the company’s inventory is expected to last for approximately 36.5 days. Try adjusting your re-order points to be lower, so you’re only bringing in new stock when you really need it. Yes, if a company ends up selling more goods than the inventory it has, the turnover can become negative. This can be common in the manufacturing industry where a customer might pay for a product before parts or materials are delivered.

Example 2: Formula based on Inventory Turnover Ratio

DSI is the first part of the three-part cash conversion cycle (CCC), which represents the overall process of turning raw materials into realizable cash from sales. The other two stages are days sales outstanding (DSO) and days payable outstanding (DPO). While the DSO ratio measures how long it takes a company to receive payment on accounts receivable, the DPO value measures how long it takes a company to pay off its accounts payable.

Products

We then multiply that number by the number of days in the month (30), which gives us 37.5 as our final answer. If you see that a product has a high DOH, it may mean that you need to adjust your production levels downwards. On the other hand, if a product has a low DOH, it may be time to ramp up production. Alix delights in finding ways to deliver actionable insights to retailers and restaurateurs. When not cooking up data-driven blogs with valuable tricks and tips, Alix is on the hunt for new ways Lightspeed can help entrepreneurs bring their cities to life. So you’ve crunched the numbers and you feel your inventory DOH is too high.

Your inventory days on hand (DOH), also known as days of sales inventory, is exactly what it sounds like—the number of days your inventory stays in stock (on hand), on average. It’s a measurement of how quickly you go through your stock, which means it’s a measurement of how long the money you spend acquiring your inventory stays tied up in your inventory. When your stock is stagnant, business is stagnant—but when you’re smart about how you manage your inventory, you can keep the cash flowing and your customers happy. The days sales in inventory (DSI) is a specific financial metric that’s used to help track inventory and monitor company sales. Knowing how to calculate DIS and interpret the information can help provide insights into the sales and growth of a company.