Inventory Days on Hand: Formula & Strategies for 2023
Learn how to calculate and reduce your business’s inventory days on hand with the best strategies of this year!
Use Circuit for Teams to save up to 20 percent on delivery costs, minimize failed deliveries, and optimize the last-mile delivery aspect of your inventory management.
What does “inventory days on hand” mean, and how do you measure it?
Calculating the ideal number of inventory days on hand (DOH) saves your company tons of money. Ideally, you want to reduce inventory days on hand as much as possible.
In this article, we’ll show you how to reduce your inventory level on hand to improve cash flow and excel at supply chain management.
- Your inventory days on hand (DOH) includes the number of days it would take to sell your current inventory stock.
- The formula to calculate inventory DOH is: (Average inventory for the period/Cost of goods sold per day) x 365
- A low DOH saves your company money and prevents stock from expiring or going obsolete.
- Reduce DOH by using demand forecasting, improving your inventory distribution strategy, and packaging stored inventory items together.
What are inventory days on hand?
Your number of inventory days on hand is how many days your inventory is expected to last (often referred to as DSI or “days sales of inventory”). Most companies have one to two months of inventory days on hand, but this can vary — especially for perishable products.
Reducing inventory days on hand means you’ll have less money tied up in supplies and more money in your pocket.
Note: Don’t confuse inventory “days on hand” with “days of inventory” (the average number of days it takes to sell your entire inventory).
Financial analysts and investors can look at these metrics on your balance sheet and tell you how effectively your business manages inventory. They can tell you you’re doing awesome if your numbers are low, or they can give you a kick in the pants and tell you how much money you’re wasting if your metrics are too high.
Spoiler: If your DOH is too high, you may have too much safety stock on hand (we wrote a whole article about safety stock, if you’re interested).
Keep in mind that your inventory DOH and your inventory turnover rate are related but not identical. Your inventory turnover ratio has more to do with how many times your inventory turns over during a given time period.
Meanwhile, DOH reflects your current value of inventory based on how many days you could continue to meet consumer demand before experiencing a stockout.
How to calculate inventory days on hand
We know that bringing up math problems probably causes a trauma response for some of you. We get it — maybe math was your least favorite class in school, or it was right after lunch and you were often tempted to doze off.
But we won’t make you stand up in front of the class or show your work. We’ll give you the formula and do an example calculation to show you how this works.
Inventory days on hand formula
Here’s the formula, as promised:
Inventory days on hand = (Average inventory for the period/Cost of goods sold per day) x 365
Before we get too far into this, let’s break down the terms in the formula:
- Inventory days on hand. A quick reminder (in case your memory is worse than Ten-Second Tom from “50 First Dates”), your inventory DOH is the number of days you expect your inventory to last.
- Average inventory for the period. This is your average inventory calculated over at least two accounting periods. One way to figure it out is to add your ending inventory from each month in a year and divide by 12. Beginning inventory also works, if that’s how you roll.
- Cost of goods sold (COGS). This is the direct cost of producing the items you sell. It includes raw material costs, labor costs, and any other direct costs. We wrote an entire article on COGS.
- 365. The number of days in a year. Hopefully, you’re not reading during a leap year, or I’ve just lost my credibility.
Remember the order of operations? It’s that principle you covered back in sixth-grade math that probably had some sort of acronym to go with it.
Anyway, it’s important here because it reminds us that we have to do the problem in parentheses first. Keep that in mind when looking at the example below.
Let’s imagine a real-world scenario where you would use this formula.
Imagine you sell insulated water bottles. Your average inventory is 1,500 bottles, and your average cost of goods sold is $10,000 per month to produce 1,000 units (or $10 per bottle).
Let’s plug these numbers into our formula and see what we get.
Inventory days on hand = (Average inventory for the period [1,500]/COGS [10,000]) x 365
1,500 divided by 10,000 is 0.15.
Multiply 0.15 by 365 and you get 54.75.
Round that up, and your number of inventory DOH is 55.
Most companies have between one and two months of inventory on hand, so this result is pretty average. However, it may help to think about how to shorten your inventory days on hand. We’ll cover that next.
How can shortening inventory days on hand help your business?
Here are some examples of how reducing your inventory days on hand is good for business:
- More money on hand. Show me the money! This is what it’s about, right? Shortening inventory days on hand puts more green back in your pocket.
- Better response to customer demand. If your money isn’t tied up in excessive inventory days on hand, you can respond to customer demand when you identify a need for new products. Even if you experience sudden high inventory turnover in a given period for a particular product, you can respond appropriately because your resources aren’t tied up.
- Lower risk of obsolescence. What if customers decide they don’t want your product anymore? What if demand unexpectedly drops? What if you store perishable goods that go bad before you can sell them? Lowering your inventory DOH lessens a potential financial hit. Isn’t this what all business owners want?
Strategies to reduce inventory days on hand
“OK, OK. Lowering my inventory days on demand is a good idea. But how do I do it?”
I’m glad you asked, and thanks for keeping us on track — that’s what we want to cover next. Here are some plug-and-play tips that can help.
Accurately forecast demand
Customer demand directly impacts the amount of working capital you need on hand.
Obvious as it is, accurately forecasting demand helps you make better decisions about how much product to purchase. Nail this step, and you can purchase enough supply to satisfy your customers without tying up too much money in excess inventory.
To start, evaluate your recent data and consider what underlying forces may impact your current numbers. Think about future uncertainties and choose a demand-forecasting strategy that best fits your business.
Distribute inventory effectively
Inventory distribution means strategically distributing your products across different locations or channels for efficient delivery. This way, you can track your inventory accurately, avoid mistakes, and prevent lost sales.
It involves defining where your materials or products will come from, choosing a reliable inventory tracking method, and continuously reviewing and improving your inventory receiving procedures. These steps can help you optimize your inventory management and keep your business running smoothly. In short, it means one less thing to worry about as you lead your business.
Package items together
Simplifying the process decreases the potential for errors while streamlining your inventory management system.
Discover how Circuit for Teams can streamline your shipping processes
We’ve covered a lot of ground in a few short paragraphs. Hopefully, you’ve learned a few things about calculating days in inventory and even had some fun along the way.
That’s not the only thing you’ll save. Thanks to our driver route optimization, you’ll cut down on how much time drivers spend on the road by automatically creating the most efficient routes.
Your customers will love Circuit for Teams. It’ll cut the number of times they experience failed deliveries and give delivery status notifications, so they’ll never wonder when their items will arrive.
Try Circuit for Teams for free today! We think you’re going to be an instant fan.