Days Sales in Inventory Ratio

Days Sales in Inventory Ratio | Formula | Example | Analysis

Days Sales in Inventory

Table of Contents

Days Sales in Inventory also known as days inventory outstanding. For the sale of all inventory, the company takes the number of days which is called days sales in inventory.

It shows how many days a current stock of a company of inventory will last.

 

There is 3 main reason due to which it is important for investors and creditor. Because it is used to measure values, cash, and liquidity.

First of all investors or creditor knows about the inventory of the company that is valuable or not. As compared to old inventory fresh inventory has more worth.

The days’ sales in inventory mean that how many days inventory take to sold or simply it shows that how fresh the inventory is.

This ratio is used to shows the liquidity of the company. If the days’ inventory outstanding is shorter the company will be more liquid but in the days inventory outstanding is longer then the company will be less liquid.

More liquid company means the cash flow of the company is better.

Formula

We can get the days’ sales inventory by dividing the ending inventory by cost of goods sold and then multiply by the number of days which mostly equal to 365 days that is:

Days Sales in Inventory ratio formula

Days sales inventory = (Ending inventory/cost of goods sold)x365

We get ending inventory from the balance sheet and cost of goods sold from the income statement and multiply the time period which we select.

Inventory calculation based on the number of turn inventory which company use. Just divide the 365 by turnover ratio you can use inventory turn over ratio in the above formula.

Days inventory focus on the ending inventory and inventory turnover focus on the average inventory.

Analysis

The main component in the inventory management of the company is days sales in inventory. Inventory is the main component which is difficult to store and maintain.

For the increment of cash flow management want to move inventory as soon as possible. If the inventory remains for a long time in shelves then cash of the company cannot be used for other operation of the company.

Management purchase the stock of money which the company can move in the next 90 days. If the inventory remains longer then it makes the extra cost for the company.

So it is clear that as compare to high ratio lower days outstanding inventory is favourable.

Example

Management of the furniture company is happy with its sales staff because of making more inventory as compared to the previous year inventory. ending inventory in the financial statement is $50,000 and the cost of goods sold is $150,000. Days sales in inventory of that company are:

122=(50,000/150,000)x365

So in 122 days, this company turn its inventory into cash. It depends on the industry of this company that the inventory of this company is long or short.

For more Financial Ratio Check: 

Cost of goods sold

Current Ratio

Days payable outstanding

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