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    Days Inventory Outstanding

     

    ‘Days inventory outstanding’ measures how efficiently company manages its inventory. Inventory often is the main part of working capital and it is very important to managed inventory efficiently. There might be few reasons for that:

    • Higher inventory means higher working capital which costs money for the company.
    • In many cases inventory depreciates either physically either morally; this also costs money for the company. 

     

    Mostly the meaning of this ratio depends on the sector of the company, and only similar companies should be compared. It is natural that every business tries to make its inventory management more efficient but it is not as easy as may look. The highest management standards and computerization have to be implemented in company’s production procedures which may take few months or even years to achieve really good results in inventory management. 

     

    ‘Days inventory outstanding’ formula


    Days inventory outstanding = Inventory / Cost of goods sold) * Number of days in period

     

    * ‘Inventory’ of the company can be found in company’s balance sheet. Average or end of the period data is used for inventory depending on the purpose of analysis and seasonality of the business. ‘Cost of goods sold’ (could be named as COGS or ‘cost of sales’) is provided in the income statement. Number of days depends on the period of ‘cost of goods sold’ from income statements, while accountants use 360 or 365 days period for annual data. 

     

    This ratio is one of the parts in ‘cash conversion cycle’. Another similar ratio which basically calculates the same only in different way is ‘inventory turnover ratio’.

     

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