Flow of the Days in Inventory Article

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Days in Inventory Formula

Days in inventory formula tells you how many days it takes for a firm to convert its inventory into sales.

Let’s have a look at the formula below.

As you can see that we need to know the Inventory Turnover Ratio before we ever can calculate the inventory days; here’s the formula of inventory turnover –

Now, the cost of goods sold can also be divided by the average inventory (that is the average of the beginning and the ending inventory) to find out the inventory turnover ratio.

Explanation of Days in Inventory Formula

Days in Inventory formula is used to see how many days the firm takes to transform inventories into finished stocks.

Since a major part of “days in inventory formula” includes the inventory turnover ratio, we need to understand inventory turnover ratio to comprehend the meaning inventory days formula.

Inventory turnover ratio helps us understand the efficiency of the company to handle the inventories. It shows that how good the company is to reduce overspending on inventory and also how well a company can convert the inventory into finish stocks.

For example, if a firm’s inventory turnover ratio is 10, then it means that the firm turns inventory into finished stock 10 times in a year.

And there comes the value of inventory days formula.

If we consider that there are 365 days in a year, we can see the days it takes for the firm to transform inventories into finished stocks. All we need to do is to divide the number of days in a year by the inventory turnover ratio.

Extending the above example, we get = (365 days / 10 times) = 36.5 days in inventory to transform the inventory into finished stocks.

Use of Days in Inventory Formula

We can derive the formula by including the number of days of the year with the inventory turnover ratio.

If you ever want to know about the efficiency of inventory management of a firm, you should look at both – inventory turnover ratio and inventory days.

By trying to find out the inventory days, you would be able to calculate both of the above ratios.

By using inventory days formula, you will get to know how much time a firm takes to manage and transform its inventory.

Days in Inventory Formula Example

Let’s take a practical example to calculate inventory days.

Niti wants to know the inventory days of Company Him. Here are few details she gathered –

• The beginning and the ending inventories of the year are – $40,000 and $60,000 respectively.
• The cost of goods sold is $300,000.
• The year consists of 365 days.

Find out the Days in Inventory for Niti.

Here, first, we need to calculate the average inventory.

We know the beginning and the ending inventory of the year. We will use simple average to find out the average inventory of the year.

• Average inventory of the year = (The beginning inventory + The ending inventory) / 2
• Or, Average inventory of the year = ($40,000 + $60,000) / 2 = $100,000 / 2 = $50,000.

Now, we will find out the inventory turnover ratio.

• Inventory turnover ratio = Cost of Goods Sold / Average Inventory = $300,000 / $50,000 = 6 times.
• Therefore, the inventory days would be = 365 / 6 = 61 days (approx.)

Days in Inventory Calculator

You can use the following Days in Inventory Calculator

Days in Inventory in Excel (with excel template)

Let us now do the same example above in Excel.

This is very simple. First, you need to find out the average inventory of the year. And then you will find out the inventory turnover ratio.

You can easily calculate the ratio in the template provided.

First, we need to calculate the average inventory.

Here We will use the simple average to find out the average inventory of the year.

Now, we will find out the inventory turnover ratio

Below is the formula to calculate Inventory Turnover Ratio

Now, we will find out the Days in Inventory for Niti

You can download this Days in Inventory Template here – Days in Inventory Excel Template

Recommended Articles:

This has been a guide to Days in Inventory Formula, practical examples and Inventory days calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –

• Days Payable Outstanding (DPO)
• Days Sales Outstanding (DSO)
• Average Collection Period Formula
• Asset to Sales Ratio Formula
• Asset Turnover Ratio

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