Days in Inventory Formula
When businesses use the days in inventory formula, they do so to understand how many days it takes to turn inventory over. Every business’ goal is to move inventory faster to become more profitable and free up cash. The longer inventory sits around in the warehouse, the less storage space available for production. An item’s sale price can change over time as demand wanes, compelling the manufacturer, wholesaler, or retailer to reduce prices and lower profit levels.
If you manage your inventory on spreadsheets, you can apply a formula to each of your products to give you the number of days in inventory. Start by totaling the balances of the beginning and end of a month and then divide that figure by two to give you the average inventory cost. Working from your annual income report, take the costs of good sold and divide the average inventory by that number. Then multiply that figure by 365 days.
Days Inventory Outstanding
The days inventory outstanding (DIO) standard is different for every business type and depends on the business model, too. To determine whether the figure is in a normal range for your business type, you can look up the turnover ratio for your industry to see how many times similar businesses sell their products in a year. If you divide one year (365 days) by that inventory turnover figure, it will give you the average days in inventory for your industry. (You can find inventory turnover data here: https://www.readyratios.com/sec/ratio/inventory-turnover/)
Real-time Inventory Quantities and Costs with SOS Inventory
Most businesses don’t last long operating on spreadsheets – at least not the ones that are growing or preparing for growth. To expand, you must be able to pinpoint costs, problems, and quantities at any point of the workflow stage with precision. The only way everyone in your business can have access to accurate information is if it is centralized by inventory software. SOS Inventory is great at inventory control from end to end, empowering small businesses to become much bigger ones, armed with detailed inventory functionality that puts you in charge of your entire business operation.
Putting Your Days in Inventory Formula Result to Good Use
- One way to shorten the number of days in inventory is to offer a volume discount. Volume discounts can increase order quantity and move inventory through faster. Sluggish inventory can cause cash flow problems for some businesses that may need the funds to apply towards other areas of their business. By monitoring the change in the number of days in inventory, a business can measure its efforts for improvement.
- Make decisions about quantities of raw materials or products purchased. If inventory isn’t moving, you can update your reorder points and quantities to scale back production. If your products are perishable, this is especially important for preventing spoilage.
- You may decide to increase your marketing efforts to sell inventory that has been sitting for long periods.
- Analyzing seasonal fluctuations of days in inventory will help you plan for the following year, letting you know how to adjust your purchase order volume.
The beauty of working with SOS Inventory software is the benefit of built-in inventory optimization tools to ensure you are meeting demand while minimizing cash flow tied up in inventory. When your inventory quantities are tabulated in real-time and costs are up to the minute in all workflow stages, it’s easier to shorten days in inventory. SOS Inventory provides advanced reporting functionality so you can pinpoint where to focus your efforts and measure the impact of those changes.
If you’re looking for greater inventory control and optimization, look no further than SOS Inventory software.