Days in Inventory Formula (Table of Contents)
- Days in Inventory Formula
- Days in Inventory Calculator
- Days in Inventory Formula in Excel (With Excel Template)
Days in Inventory Formula
Days in inventory is basically used to determine the efficiency of a particular company in converting inventory into sales. It is calculated by dividing the number of days in the period by inventory turnover ratio. The numerator of the days in the formula is always 365 which is the total number of days in a year.
To understand the days in inventory formula one should look at the inventory turnover formula used in the denominator.
In other words shorter the inventory outstanding indicates the company has the potential to convert the inventory into cash within a short time.
Closing inventory or closing stock is found on the balance sheet and the cost of goods sold is calculated after deducting the material costing from the revenue in the income statement.
Thus dividing 365 by the inventory turnover ratio we can get the formula of days in inventory.
Examples of Days in Inventory Formula
Let’s take an example to find out the Days in Inventory for a company: –
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Days in Inventory Formula – Example #1
X Ltd. has a closing Inventory in its Balance Sheet at INR 20000 and its Cost of Goods Sold stands INR 100000. Find Days Sales in inventory.
Days Sales in inventory is Calculated as:
- Days in Inventory =(Closing Stock /Cost of Goods Sold) × 365
- Days Sales in inventory = (INR 20000/ 100000) * 365
- Days Sales in inventory = 0.2 * 365
- Days Sales in inventory= 73 days
This means the existing Inventory of X Ltd will last for the next 73 days depending on the same rate of Sales for the following days. So a peer analysis can be done where the number of inventory days can be compared with its competitors in the same industry. This will help to analyze the product of the company and as well as the condition of the business.
Days in Inventory Formula – Example #2
Tata Steel limited has Closing Inventories for FY18 and FY17 of INR 28,331.04 Cr and INR 24,803.82 Cr respectively. The company’s Cost of Goods sold to stand at INR 41,205.43 Cr and INR 32,418.09 Cr respectively for FY18 and FY17. Find which financial year has better Inventory Days?
Days Sales in inventory is Calculated as:
- Days in Inventory =(Closing Stock /Cost of Goods Sold) × 365
- Days in Inventory for FY17 = 24,803.82/ 32,418.09 * 365
- Days in Inventory for FY17 = 0.7651 * 365
- Days in Inventory for FY17 = 279.26 days
Days Sales in inventory is Calculated as:
- Days in Inventory =(Closing Stock /Cost of Goods Sold) × 365
- Days in Inventory for FY18 = 28,331.04 / 41,205.43 * 365
- Days in Inventory for FY18 = 0.6875 * 365
- Days in Inventory for FY18 = 250.96 days.
Thus, we get an assumption of the business conditions that the churning of inventory to cash has reduced from 279.26 Days to 250.96 days. The company has for reduced the closing stock its inventory and there might be a downgrade of the order book for the current financial year and that is why the company is holding lower inventory.
Days in Inventory Formula – Example #3
Nocil limited has Closing Inventories for FY18 and FY17 of INR 155.27 Cr and INR 114.58 Cr respectively. The company’s Cost of Goods sold to stand at INR 444.19 Cr and INR 330.03 Cr respectively for FY18 and FY17. Find which financial year has better Inventory Days?
Days Sales in inventory is Calculated as:
- Days in Inventory =(Closing Stock /Cost of Goods Sold) × 365
- Days in Inventory for FY18 = 155.27/ 444.19 * 365
- Days in Inventory for FY18 = 0.3495 * 365
- Days in Inventory for FY18 = 127.58 days
Days Sales in inventory is Calculated as:
- Days in Inventory =(Closing Stock /Cost of Goods Sold) × 365
- Days in Inventory for FY17 = 114.58/330.03 * 365
- Days in Inventory for FY17 = 0.3471 * 365
- Days in Inventory for FY17 = 126.72 days
Thus from the above calculations, it has been found that the Business scenario is more or less in the same state. The rising inventory level suggests that there has been an increase in demand for the products but the efficiency of the business has been at the same level.
Explanation
Days in Inventory formula indicates this is one of the important formula which gives creditors and investors to measure the value liquidity and the cash flow of the particular company. As in the world of finance, we all know that old inventories value lesser than the new one.
So Days in Inventory formula helps to indicates the stock position and its intrinsic value and is very helpful for a manufacturing business. The days sales in inventory ratio show the company that the present status of its inventory and how long they are going to last?
We all know inventory is very liquid in nature or in other words it can be turned into cash whenever required depending upon the type of stock and the demand for it.
Quick inventory period indicates a hard working capital in most of the cases.
the formula of days sales inventory is calculated by dividing the closing inventory buy the cost of goods sold and multiplying it by 365. Thus management of any company would want to churn it’s stock as fast as possible to reduce the other related expenses and to improve cash flow.
Significance and Use of Days in Inventory Formula
- The days sales in inventory show the how quickly the inventory in a particular business is churning or in other words how praise the inventory is?
- Days in Inventory formula also indicates the liquidity of the inventory and the position of working capital as.
- The day’s sales in the inventory are one of the major components which decide the inventory management of a particular company. Inventory has a maintenance cost and as well as it has to keep under certain circumstances depending upon the product of the particular business. So, in other words, excess inventory is not good for the financial health of a particular business.
- There is insurance cost attached to every inventory. So the maintenance cost adds if an inventory stays for long. This additional expense is not good for profitability and there is a chance of inventory obsolesces.
- Higher Inventory with low inventory days indicates the business is growing and the management is able to increase its inventory management.
- Lower Inventory balance with extended inventory days is an indication that the management is facing challenges in selling the products and the sales team has to be more efficient in the coming days.
- It’s an important tool for the investors as well as it determines the business efficiency and if the investors should hold the stock of that particular business or not. Depending on the Inventory days of the companies in the same group the investors might give a call।
Days in Inventory Formula Calculator
You can use the following Days in Inventory Calculator
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Days in Inventory Formula in Excel (With Excel Template)
Here we will do the same example of the Days in Inventory formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Closing Stock and Cost of Goods Sold
You can easily calculate the Days in Inventory using Formula in the template provided.
Days Sales in inventory is Calculated as:
Days in inventory for Tata Steel is Calculated as:
For FY17:
For FY18:
Days in inventory for Nocil limited is Calculated as:
For FY17:
For FY18:
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