Inventory Days on Hand - Formula Definition And Examples

Posted on: August 30, 2020

Knowing how long your inventory lasts before it runs out can make or break your business. Because in today’s crowded business environment, telling your customers that a product is out of stock might drive them to a competitor store, which might mean losing their business forever.

But when you have an accurate view of your stock levels, you can ensure that your customers will always find what they’re looking for, which might win you their loyalty.

Inventory days on hand is a measure that helps you determine how often you should replenish your inventory. But how is it calculated? Read on to find out.

What is Inventory Days On Hand?

Inventory days on hand is a metric businesses use to determine how many days it takes, on average, to sell or use specific items in their inventory. Calculating the inventory days on hand for their products helps businesses minimize stockouts and avoid overstocking.

Why Inventory Days On Hand Matters (Why Are They So Important)

Inventory management is vital for most businesses, and it’s especially important for eCommerce businesses that attract clients from all over the world. Since these businesses attract a lot of clients, it can be very difficult to predict how many items they should have on stock. 

Some items may become trendy overnight, while some other items may fall out of fashion just as fast. In addition to the global threads and organic client base growth, businesses also have to factor in large promotion periods such as Black Friday, Cyber Monday, or Christmas. 

Stocking up for these periods is recommended, but businesses can’t get an accurate projection of how many items they need without knowing how many items they sell on a day-to-day basis. Without having an accurate projection of your inventory, you risk canceling some orders during busy periods, which can harm your image as a business. 

Knowing what your store’s inventory turnover ratio can indicate your enterprise’s efficiency at generating sales from its inventory, but calculating your inventory days on hand helps you determine when it’s the best time to restock your inventory. If your company’s inventory days on hand is high, your inventory turnover ratio will be low, and the other way around.  

Here are five reasons why calculating your inventory on hand days is important for your business: 

1. Inventory Effectiveness 

The inventory days on hand metric can help you determine the effectiveness of your company’s inventory management. By determining the number of days your company needs to hold onto an inventory before it manages to sell it, this metric helps you measure the average length of time that your company’s money is tied to the inventory. 

If your company’s inventory management is well-planned, your money shouldn’t be tied to the inventory for a long period of time. However, this period is variable and it’s closely linked to your company’s industry. 

For example, businesses operating in the automobile or furniture industry can afford to hold on to their inventories for a long period of time, whereas businesses operating in the fast moving consumer goods industry cannot. 

2. Lower Storage Costs

If your inventory days on hand is low, you won’t have to spend as much on warehousing. Instead of storing a large inventory for a long time, you can maintain a constant flow of restocking and shipping out your inventory

3. No Overstocking 

Overstocking is usually detrimental to your business because it increases your warehousing costs and it keeps your money tied to your inventory. Inventory generally represents a large chunk of a company’s operational capital. If you overstock and your inventory days on hand is high, your company’s capital will be stuck in that inventory for a long time, so you won’t be able to use it. 

But if you calculate your inventory days on hand and determine that certain items remain in your inventory for long periods of time, you can manage your inventory better and buy fewer of those items. 

That being said, overstocking can be useful if you believe that the short supply for a particular product is expected to increase in the immediate future, which is what happens during promotional periods. 

4. Fast Profits 

Knowing which of the items you sell quickly can give you an edge in business. If the inventory days on hand for certain items in your inventory is low, you can stock on more of those items, which might lead to more profits. 

On the other hand, you can build promotions around certain items in your inventory that have a high inventory days on hand to move them quicker and thus make more money quicker. 

5. No Stockouts 

Keeping an accurate inventory days on hand estimation enables you to restock in time and have the right number of items available at all times. And when you don’t have any stockouts, you ensure that your customers benefit from the best possible shopping experience.

How To Calculate Your Inventory Days On Hand

Inventory days on hand is a metric that’s easy to calculate using the following formula:

\[\text {Inventory Days On Hand} = { \text {Average Inventory} \over ( { \text {Cost Of Goods Sold} \div \text {365 Days} } ) } \]

\[ \text {Where Average Inventory is} = {\text {Beginning Inventory} + \text {Ending Inventory} \over 2}\]

For example, let’s say that a business had a

  • Beginning Inventory of $1,000,000 
  • Ending Inventory of $220,000
  • Cost Of Goods Sold of $5,200,000

In this case, their Inventory Days On Hand is calculated as:

\[ \text {Average Inventory} = { { $1,000,000 + $220,000 } \over 2 } \]

\[ \text {Average Inventory} = $610,000 \]

\[ \text {Inventory Days On Hand} = { { $610,000 } \over ( { $5,200,000 \div \text {365 Days} } ) } \]

\[ \text {Inventory Days On Hand} = 42.82 \; \text {Days} \]

This means that, on average, the business had 42.82 days of inventory on hand during an entire year.

How Ship Expert Can Help With Your Inventory Days On Hand

Ship Expert’s warehousing and fulfillment services enable you to focus on growing your business without worrying about storing, packing, and shipping your products. We handle all that for you, and we’ll keep your inventory days on hand low. Here’s how.

icon inventory management

Inventory Management And Tracking

Ship Expert’s fulfillment centers are distributed across Canada, so you don’t need to stock a lot of products in the same warehouse. 

In fact, thanks to our inventory management and tracking system, as soon as your order is placed, we automatically ship it from the fulfillment center that’s closest to your customer. 

Distributing your inventory among multiple fulfillment centers not only ensures that all your orders will reach your clients in a short amount of time, but it will also reduce your storage and shipping costs. 

And the best part is that you always have a real-time view of your inventory, sorted by location. You can easily calculate your inventory days on hand and restock before a center runs out of products. 

icon low stock notifications

Low Stock Notifications And Movement Tracking

With Ship Expert’s technology, you get automatic notifications each time a product’s stock is running low. In addition, you can also see how certain products were moved between fulfillment centers. This can help you determine the product’s inventory days on hand and estimate how often to restock your inventory. 

Ship Expert makes calculating your inventory days on hand easy

You can track all the data you need on your dashboard, so you can always make the best decisions for your business. 

Create an account today and gain total control of your inventory.

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