Days Sales in Inventory Definition and Example
Days Sales in Inventory Definition – A measure of how long it takes a company to sell the average amount of inventory on hand during a given period of time. To calculate inventory days, divide average inventory by cost of goods sold per day.
In simple words, Days sales in Inventory means how many days the management requires to sell off the inventory. The faster the inventory gets clear off, the more the efficient the management is. Days Sales in Inventory is important for the stakeholders of the company especially Creditors and Investors. This tool measures the liquidity, value and cash flows of the company.In addition to this, it also shows how efficient the organisation is selling its inventory.
An important thing to note that is a new inventory is always more valuable than the existing one.The reason behind this is obsolescence.This ratio also shows the efficiency of the company by converting the existing inventory into cash.The shorter time the company needs to clear the inventory, the more efficient is the management. Ultimately it will result in flow of higher cash flows.
Days Sale in Inventory = (Ending Inventory/Cost of goods sold) ×365
The ending inventory of the firm appears on the Balance Sheet whereas Cost of goods appears in the Income Statement of the company. Alternatively, one can also use for finding out in how many days company is able to sell its inventory. All you need to do is divide it by 365 days.
Days Sales in Inventory Example
To understand days sales in inventory definition more clearly, let’s discuss an example.
The Ending inventory of ABC ltd is Rs. 1,00,000 and the COGS is Rs. 2,00,000. Calculate the Days sales of Inventory
Days Sales of Inventory = (1,00,000/2,00,000) ×365
= 182.5 days
Importance of Days Sales in Inventory – Why Days Sales of Inventory is Used?
This is one of the most important component of the company’s inventory management.Keeping inventory is very costly for the business as it involves storage and holding cost. In addition of this,there is also fear of theft and obsolescence. So, management always work keeping in mind that inventory move faster. This will not only results in decreasing the holding cost but also bring cash for the business. In case management is unable to sell off its inventory, then it will result in holding a lot of amount of cash plus there is also opportunity cost. The cash that yet has not been released.