What does "Days in Inventory" Mean?

Days in inventory is a ratio people can use to determine, on average, how many days goods spend in inventory. Several different formulas can be used to find this ratio, depending on the approach a person wants to take. This, along with other sales metrics, can be used in inventory management and planning, allowing people to make decisions about stocking and related matters on the basis of hard numbers about the business.

If the days in inventory ratio is high, it means goods are sitting in inventory for a long time. The longer goods are held in inventory, the more expensive they become, because the business will need to pay costs like overhead to maintain a facility for storage, security, and so forth. Sometimes, goods move slowly because they are expensive or unusual, and a business may keep several large ticket items on hand to make them available while trying to move larger numbers of small items to make up for it. An appliance store, for example, might sell three appliances a week, but sell numerous accessories like new stove burners, appliance timers, and so forth.

A high days in inventory ratio can turn into high overhead for the business. As long as the goods don't sell, the business can't pay vendors from the proceeds and must pay upkeep expenses. The business wants to avoid situations like this. Keeping too much on hand in general may eventually drive a business into bankruptcy, as creditors will grow impatient for payments, and the business may not be able to cover payroll and other basic expenses.

When the days in inventory ratio is low, it means goods do not stay on the shelf long, moving through the store quickly. While high turnover is usually a good thing, it can become a problem. A business may not be stocking enough to meet the demand, forcing customers to go elsewhere to meet their needs and causing customer frustration. The business needs to strike a balance between overstocking and not having enough on hand for customers.

One way to determine days in inventory is to take the average daily inventory of a product, multiply by 365, and then divide by the sales revenue. Keeping accurate inventory records is critical, as otherwise, the calculation may not be correct, and a small skew in numbers can turn into a large error at the end of the equation.