Days Sales in Inventory

What Does Days Sales in Inventory Mean?

Days sales in inventory shows how many days of sales it takes to turnover inventory.

How it Works

At any stage during the year, the business will have a certain amount of inventory. 

This inventory will be continually depleted as it is sold. 

At the same time, the business will continually replenish that inventory with fresh purchases.

This means, the business will turn over its inventory, again and again throughout the year. 

The number of days taken to do this each time is known as days sales in inventory.

Significance of Days Sales in Inventory

Management and analysts use days sales in inventory to gauge the business’s performance.

For example, if days sales in inventory is low, it indicates the business is running efficiently.

A high number would indicate inefficiencies such as higher inventory carrying costs, insurance, rent, and storage costs.

It also means money tied up in inventory is not available for more productive activities. 

All of this impacts on a business’s performance. 

Calculating DSI

To help them monitor the business’s performance, management and analysts use a formula to calculate D.S.I

First, you need to calculate the inventory turnover ratio component of the formula.

To do this, you calculate average inventory or alternatively just use the closing inventory.

Then you divide this by the cost of goods sold for the period.

Cost of goods sold shows total purchases of goods for the year. 

By making this calculation, you will find how many times the inventory was turned over during the year. 

The resulting answer is a decimal known as the inventory turnover ratio. 

Now, you figure out how many days it takes for inventory to turn over. 

To do this, you multiply the turnover ratio by 365. 

The result will show how many days it took to turn inventory over.

© R.J. Hickman 2020