How to Calculate Average Days to Sell Inventory

Average days to sell inventory is a financial metric that measures the average number of days a company holds its inventory before selling it. This figure provides insight into how efficiently a business manages its stock and converts it into sales. It serves as a straightforward indicator of inventory liquidity and sales performance.

Understanding Key Data Points

Calculating average days to sell inventory requires two primary financial figures: Cost of Goods Sold (COGS) and Average Inventory. Cost of Goods Sold represents the direct costs attributable to the production of goods sold by a company during a specific period. These costs include the direct materials used to create the product, the direct labor involved in manufacturing, and any manufacturing overhead directly tied to production. Businesses can find this figure on their income statement, usually appearing just below revenue.

Average inventory provides a smoothed representation of the inventory level over a period, mitigating the impact of large fluctuations that might occur at specific points in time. To calculate average inventory, a business adds the value of its beginning inventory (stock at the start of an accounting period) to its ending inventory (stock at the end of the same period) and then divides the sum by two. These beginning and ending inventory values are found on a company’s balance sheets for the relevant periods. This average provides a more accurate picture of stock held over time, rather than relying on a single, unrepresentative snapshot.

The Calculation Process

Once the Cost of Goods Sold and Average Inventory are determined, calculating the average days to sell inventory becomes a direct application of a formula. The formula is expressed as: (Average Inventory / Cost of Goods Sold) 365 days. The “365 days” accounts for a full year, providing a daily measure, though other periods like 90 days for a quarter could be used.

To illustrate, consider a business with an Average Inventory of $100,000 and a Cost of Goods Sold totaling $500,000 for the year. First, divide the Average Inventory by the Cost of Goods Sold ($100,000 / $500,000 = 0.20). This ratio indicates that, on average, the inventory held represents 20% of the cost of goods sold. Next, multiply this result by 365 days (0.20 365 = 73 days). Therefore, this company takes 73 days to sell its inventory.

Analyzing the Outcome

Interpreting the average days to sell inventory figure involves considering what a higher or lower number indicates about a company’s operations. A higher number of days suggests that inventory is moving slowly, which could point to several issues, such as declining demand for products, inefficient sales strategies, or potential inventory obsolescence. Holding inventory for longer periods also increases carrying costs, including storage expenses, insurance, and the risk of spoilage or damage.

Conversely, a lower number of days to sell inventory indicates efficient inventory management and strong sales performance. This suggests that products are in high demand and are moving quickly through the sales pipeline, minimizing the amount of capital tied up in stock. A quicker turnover can lead to reduced storage costs and a lower risk of inventory becoming outdated.

What constitutes an “ideal” average days to sell inventory varies significantly across different industries and business models. For instance, a grocery store might aim for a very low number of days due to perishable goods, while a luxury car dealership would naturally have a higher number because of the nature and cost of its products. Therefore, comparing a company’s metric to industry benchmarks or its own historical trends provides a more meaningful context for analysis. Businesses use this metric to make informed decisions regarding inventory ordering, marketing adjustments, and operational efficiency.