One of the most important decisions that a business has to make is how to manage its inventory. To do this, using the days sales in inventory measurement could be very beneficial.
This article will explain what the concept of days sales in inventory is. You can also see how it can be calculated, how it can be used as a comparative tool, and how you can use it to optimize your business practices.
What Is the Days Sales in Inventory Measurement?
The days sales in inventory measurement is a financial measurement that tests how long it would take for a company to turn its inventory into products available for sale. A business can use the measurement to calculate whether they have enough inventories on hand to make orders in a certain period of time.
The business and inventory manager can also use it to determine whether they have too much inventory. This is helpful to make better purchasing decisions and enhance inventory control systems.
How Do You Calculate Days Sales in Inventory?
When you are looking to calculate days sales in inventory there are a few different things that you need to follow.
- The first thing that you will need to do is to properly calculate your current inventory. Your inventory should include your entire inventory on hand. This also adds up any goods that are a work in progress. It should always exclude any inventory that appears as damaged or no longer usable.
- The next task that you need to do is to figure out your annual cost of sales. Your annual cost of sales should include your most recent twelve-month calculation of costs that go into each item that you produce. For this method, the only items that you should include are the costs of the inventory.
- So, you have calculated your current inventory and annual costs of inventory. Now, you should divide the inventory by the costs of sales. The resulting number will tell you how many years worth of inventory that you have. If you then multiply that number by 365, you will receive your current days sales in inventory.
What Is the Correct Level of Days in Sales Inventory? 3 Factors
Being able to calculate the days sales in inventory for your business is important. However, you also need to be able to apply the methodology to your business. One of the most important things that you need to be able to do is determine what the right days sales in inventory amount is good for your business. The level of days sales in inventory that is right for your business will vary considerably by a number of different factors.
1. The Industry
One of the main factors that will influence your days sales in inventory needs is the industry that you are in. If you are in an industry that produces consumer goods, it can be a good idea to have a higher level of inventory on hand. This way, you ensure that you have enough inventory to produce the right amount of products to meet customer demand. However, if you have too much inventory, it could cause a cash flow issue and require you to borrow money from a bank to buy it. This could then increase your capital and carrying costs.
2. How Long Products Last
If you are in a business that produces food or if the inventory can parish quickly, then it would be a better option to have lower inventory.
This will help to ensure that you do not experience a loss due to inventory that has gone bad and is no longer usable.
3. Business Season
The third factor that could include your days sales in inventory is if your business is seasonal. If you are in the consumer goods industry, you will likely experience the highest level of sales in the fourth quarter every year. Because of this, you will likely need to have a higher level of inventory in the late third quarter.
This way, you will be able to produce enough product to meet customer demand. Then, following the holidays, you will likely have a lower amount of inventory on hand due to the recent sales and use of the inventory.
How to Use the Days in Sales Inventory Measurement?
Once you have calculated the days sales in inventory, it is important to use it to your company benefit.
- The best way to use it would be to use it as a comparison tool. For example, you should complete a days sales in inventory test at least once every three months. You should also have many once per month during the higher seasonal period. You should then compare this number to the period that you had last year. This can then give you a good glimpse as to whether you have more inventory on hand or less for the same relevant period of time in the past.
- You should also look for ways to compare it to some of your competitors. If some of your competitors are publicly traded companies, then you should be able to get all of the information that you need through filed financial statements. You can then compare information to see how your inventory methods compare.
- Most importantly, you need to use the days sales in inventory to make decisions about inventory purchases. While it is good to compare to past periods, you also need to consider how future changes for your business will affect the need for more inventory. For example, if you have bigger orders ahead of you in the coming months, it would make sense that your inventory measurements would be higher as well.
So, managing inventory is a very important task for businesses of all sizes. For those that are looking for ways to better understand their inventory, using the days sales in inventory measurement could be very beneficial.
This measurement can be useful as a great comparative tool. You can also use it to help make better business decisions in the future.
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