Days' Sales in Inventory
Inventory is a big part of many different types of businesses from retailers to manufacturers. These businesses buy and sell inventory on a daily basis. Judging what inventory to buy and how much inventory to buy is often a difficult question for many managers. Companies tend to use two inventory analysis ratios to help them anticipate when to buy new inventory: days' sales in inventory and inventory turnover.
Days' sales in inventory is an inventory management ratio that measures the number of days inventory will be in stock at the current sales levels. In other words, if the company keeps selling inventory at the same rate, the days' sales in inventory will measure how many days it will take the company to run out. The days' sales in inventory calculation start by dividing the ending inventory by the cost of goods sold and then multiplying it by 365. Here is the days' sales in inventory ratio calculation:
Another way the days' sales in inventory ratio can be viewed is a cash conversion ratio. It measures how many days the inventory will take in order to be converted or turn into cash or an accounts receivable. This makes sense because once all the inventory is sold, cash or accounts receivable are collected from the customers. Thus, turning the inventory into cash.
One thing to note about the days' sales inventory is that it uses the ending inventory to calculate the days' sales. The inventory turnover ratio uses average inventory.
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