When it comes to inventory management, there are a lot of different things that we need to keep in mind. Sometimes, you might be wondering how much time you have till the inventory runs out and how you will know when to get the stock. This is where inventory on days comes into action.
In this article, we have mentioned everything you need to know about inventory days on hand, including the definition, importance, and how to calculate them. So, let’s jump right into the article and have a look at it.
What Is Inventory Days on Hand?
Days on hand, also known as Days Inventory Outstanding, is one of the key metrics when it comes to measuring the average number of days a company takes to sell its inventory. Too much inventory can cause a lot of problems, such as increasing the capital and storage. However, if a business has low stock, then it can cause dissatisfaction among the customers and also miss sale opportunities. This is why it is very important to have the right level of stock balance to ensure that you have profits and also customer satisfaction.
With the help of calculating inventory days on hand, you can ensure that you have the right levels of stock in the inventory. This also helps provide the right insights into a company’s operational efficiency. If the inventory days on hand is a lower number, then this means that the inventory is being sold out way too quickly, which is a sign that the stock is high in demand. However, a higher number of days can suggest overstocking or low profits and low sales.
inventory days on hand is very important, especially in industries like retail, manufacturing and distribution. Inventory days on hand can have a direct impact on cash flow and profitability. This is why it is very important to monitor inventory so that your business can run efficiently and reduce holding costs. This is also an amazing tool for maintaining the balance between customer demand and managing your inventory.
Why are Days on Hand Important?
Now you might be wondering why inventory days on hand is important and how it can benefit your business. Below we have mentioned several reasons why days on hand is important to monitor properly.
Lower Costs
Inventory days are of major importance because they reduce costs. The fewer inventory days you have on hand, the less capital you have tied up in the physical inventory. This also means that you will be spending less money on warehousing, and the holding cost will also be lowered.
Faster Profits
If the number of your inventory days on hand is reduced then this means you will move the inventory much more quickly and increase your sales. This will improve the profit and you will earn back the cost the inventory sold much more quickly and effectively.
Fewer Stockouts
Learning how quickly your business is using the inventory means that you can properly manage the stocks. You can actually reorder the stock and ensure that there is no stockout. This will also ensure that the customers are getting the orders on time, and it also improves the overall customer experience.
How to Calculate Inventory Days on Hand?
Now, the main question is how to calculate the inventory days on hand. Below, we have mentioned two different formulae that are being used when it comes to calculate the days on hand.
Average Inventory
This formula calculates the inventory days on hand by dividing the inventory value for the year by the amount of goods that the company sold for the year. The number is then multiplied by 365.
Days on hand = (Average inventory for the year / Cost of goods sold) x 365
For example, suppose a company has an inventory that costs around $ Days on hand = (Average inventory for the year / Cost of goods sold) x 365, and the company was able to sell goods worth $400000 for the same year. In that case, applying the formula will be.
Inventory days on hand = 50000/400000 x 365 = 45.6 days.
Inventory Turnover
Another formula that is used to calculate the inventory days on hand is the inventory turnover formula.
Inventory Days on Hand = # of days in your accounting period/inventory turnover ratio
For example, the inventory turnover for the company in the past year was 6.3. Then, according to the formula, the inventory days on hand will be as follows:
Inventory Days on Hand: 365/6.3 = 57.93
Why You Should Reduce Your Inventory Days on Hand
Lowering the inventory days on hand is very important for the business. Below, we have mentioned some of the reasons why you should reduce your inventory days on hand.
Decrease Risk of Obsolescence
If the products are kept in the inventory for too long, they can become outdated, experience or even get damaged. This is why it is important that you sell them as quickly as possible and replace them with new and fresh stock.
Increase Operational Efficiency
With the reduced days on hand, you can improve the operational efficiency. This means that you will have better organization, and it will also help with streamline the operations, improving the entire supply chain.
Lower Storage and Holding Costs
Lowering the days on hand will also reduce the holding and storage costs. You will have to pay less experience for warehousing and insurance, and this will help boost the profit margins.
How to Avoid Slow-Moving Inventory in Your Business –
There are different adjustments that you can make in your business that can help with lowering the days on hand. So let’s have a look at them.
Demand Forecasting
The best way to avoid the slow-moving inventory is to properly forecast the demand of the clients. Understanding what the customers will need in the upcoming season and the products that are more likely to be sold will improve the days on hand. This knowledge can help customers invent the right inventory that will move quickly and improve sales.
Improve Customer Service
If you don’t put effort in the customer service then the customer wont return back to your business. Having a positive customer experience can create a major difference in the sales. this is why it is always suggested to have amazing customer service and ensure that there is a fast delivery and the customers get what they have ordered.
Product Bundle
Offering product bundles to the customers is also an amazing strategy to move the inventory quickly. This is a great way to move less popular items together while still ensuring that you are not losing out on money.
Optimize Inventory with NextSmartShip
When it comes to optimizing inventory, you will find a lot of different fulfillment companies online. However, one name that stands out the most is NextSmartShip.
They can help optimize the inventory. They can improve the inventory days on hand, manage the fulfillment process, and even offer the best prices for shipping. Therefore, if you are trying to find a good fulfillment company that you can partner with, then NextSmartShip should be your ultimate option.
Conclusion
Inventory days on hand is an important aspect for the company. This shows how long it takes for the company to sell the products and also shows them the products that are in demand. Calculating the days on hand can benefit the company in a lot of different ways and helps to improve the profit. Hence, we hope this article was beneficial for you and that you now know everything regarding inventory days on hand. Also, make sure to check out NextSmartShip for its amazing services.
