Managing stock is crucial in a company that sells products to make a profit. Calculating inventory days is an indicator of how well the business is doing in terms of inventory management. It requires the determination of the cost of goods sold and average inventory in a given period. Most often, your Inventory Turnover Ratio (ITR) is calculated to measure the performance of overall inventory and to find out how the company is meeting product demand.
Average Inventory for Period
You can find this amount on the balance sheet.
Add Beginning Inventory to the Ending Inventory.
For instance, If you have a Beginning Inventory of 275,000 and an Ending Inventory of 350,000, them together and divide it by two.
275,000 + 350,000 = 625,000
With 625,000 divided by two, your average inventory is 312,500.
To calculate the Days In Inventory (DII) for your stock, use the following formula:
Inventory Days = 365 x (Average Inventory / Cost of Goods Sold)
Our average inventory (from above) is 312,500.
Our Cost of Goods Sold is $550,000.
Thus, with 365 x 0.5681818, we have 207.38 Days In Inventory.