Inventory Days on Hand: How to Calculate, Examples, & Strategies

Having a small inventory days on hand naturally means that you are holding less stock — and when you hold less stock, you have more freedom to pivot and cater to shifting customer demands. Consider retail giant Walmart Inc., which reported an ending inventory of $43.78 billion and cost of goods sold of 373.4 billion for the accounting period ending in 2018. Usually, the inventory is recorded in the statement of financial position (balance sheet), while the COGS is recorded in the annual financial statement. Because inventory binds money, a low DOH allows the company to have more capital to reinvest into the business. Companies can use it, for example, to introduce new lines or variants to respond quickly to consumer demands.

Why is inventory liquidity important?

It can be tempting to order as much inventory as possible to take advantage of supplier discounts and reduce unit costs. But look beyond bulk supplier discounts and consider the cost of storing that inventory and the risk of inventory obsolescence and dead stock. This helps you balance getting the greatest supplier discount without negatively affecting your inventory turnover ratio. Since inventory is typically a merchant’s biggest investment, customer acquisition costs (CAC) have increased by 60%, according to McKinsey. Therefore, many merchants are looking for strategies to decrease time to revenue and improve cash flow in an uncertain economic environment.

A reorder point, or ROP, represents a specific level at which your stock needs to be replenished. Simply put, it’s a metric that tells you when it’s time to place an order for new stock so that you don’t run out of goods. Reorder points are calculated by multiplying daily sales velocity by lead times in days and then adding in the safety stock. The ensuing metric can be used to make a data-driven decision for when it’s time to replenish inventory. Trends and consumer preferences can change fast — so when your inventory days on hand metric is high, you run the risk that consumer demand will change faster than you can sell your products. Keeping your inventory days on hand low makes it less likely that you’ll be left with deadstock and obsolete inventory that are difficult and costly to offload.

It can reduce holding costs

This ratio provides insights into how efficiently a company manages its inventory. Inventory Source, a UPS-backed fulfillment partner, offers comprehensive solutions to help businesses optimize their inventory management. With a fully-integrated WMS, TMS, and OMS platform,  Inventory Source enables merchants of all sizes to monitor their inventory levels across all sales channels and fulfillment locations. Collaborate days on hand with a fulfillment provider that can leverage your sales history to forecast demand and make recommendations for order times and quantities.

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• Divide the average inventory by the COGS and multiply the result by 365 (or the number of days in the considered period).
• Signifies rapid inventory turnover, reflecting efficient inventory management.
• Inventory Days on Hand is a measurement of how quickly a business turns over its inventory stock.
• Hitesh Bhasin is the Founder of Marketing91 and has over a decade of experience in the marketing field.
• Having more capital on hand allows businesses to respond quickly to changing consumer demand.
• Inventory days on hand is an important way of understanding how long merchants have cash tied up in stock.

In other words, doh tells you how long it would take for a company to completely deplete its current inventory levels if sales remained constant. The inventory turnover ratio in days, commonly known as inventory on hand, is computed by dividing 365 days by the inventory turnover ratio. This calculates the average number of days it takes a business to sell its whole inventory.

Flexibility to meet consumer demand

DOH shows you how long you can expect to hold stock before making a sale, so you can estimate your inventory storage costs. With a low DOH, businesses can downsize to a smaller, less expensive warehouse or storage unit and increase their profit margins. If there are shortages or delays in the supply chain, however, the retailer may have to hold extra inventory (safety stock) to protect itself from demand fluctuations. Inventory management software improves efficiency by using historical sales data to forecast inventory needs. That way you order the correct quantity of stock and sell inventory more quickly. While this is the typical way to calculate inventory value, some businesses may use different averaging techniques, such as the daily average inventory value over a 90-day period.

This means that it would take Company A 4.5 days to sell all of its inventory at the current sales pace. When you can effectively balance available inventory with all the other costs of doing business, you set yourself up to succeed in the competitive world of retail. However, whether you run a traditional brick-and-mortal location or an ecommerce platform, achieving that balance is no easy task.

While DIO focuses on the time it takes to sell inventory, Inventory Turnover provides insights into the frequency of inventory turnover. Both metrics are useful for evaluating inventory performance, and businesses should consider analyzing them together to gain a comprehensive understanding. By using this formula, businesses can assess the efficiency of their inventory management and make informed decisions to optimize their inventory levels.

• Although it is rare, a business can have two separate counts of inventory in one day.
• This helps you balance getting the greatest supplier discount without negatively affecting your inventory turnover ratio.
• Say a company has inventory that’s worth $43,780 and its cost of goods sold (COGS) is worth $373,400 for the year 2018.
• Maintaining stock levels to meet customer demand is crucial for minimizing inventory holding costs and maximizing profitability.
• While Inventory Days on Hand and Days Sales in Inventory (DSI) both provide insights into inventory management, they focus on different aspects.

Balancing inventory levels is key to avoiding stockouts while still maintaining a low DOH. WarehouseQuote is a managed warehousing solution helping middle market and enterprise businesses scale their warehouse operations with precision. Without enough cash on hand, business would be stagnant, failing to meet obligations. A healthy cash flow helps meet customer demands on time, preventing fulfillment issues.