How to Calculate Days of Inventory on Hand

by Carter McBride

Days of inventory on hand tells the average amount of time a company will hold inventory before the inventory is sold. A high days of inventory on hand ratio shows the company is not moving inventory fast. This could be a sign of low demand for the product. A low days of inventory on hand could lead to the company running out of inventory. If the company runs out of inventory, its profits will most likely decrease.

1. Determine the cost of goods sold and the average inventory. Cost of goods sold is on the company&amp;#039;s income statement and the average inventory is on the company&amp;#039;s balance sheet. For example, a company has $500,000 for cost of goods sold. At the beginning of the year, the company had $300,000 of inventory and at the end of the year, the company has $350,000 of inventory. The average inventory is then $325,000.

2. Divide the cost of goods sold by the average inventory. In the example, $500,000 divided by $325,000 equals 1.538461538.

3. Divide 365 by the number calculated in Step 2. In the example, 365 divided by 1.538461538 equals 237.25 days.

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