When your inventory is low, it’s hard to keep the cash flowing and happy customers. This means that you need to be smart about managing your stock for business not to die. Knowing your inventory days on hand calculation is very important. It tells you if any changes need to be made to stay afloat.
In this post, we’ll go over the days on hand calculations:
- Knowing how much inventory you have on hand is essential when running a business. When your list starts getting low, the amount of time before an order needs to be placed in advance will determine whether or not there is enough money coming in for that particular item.
- How to measure the amount of time it takes for your inventory to be depleted
- Here are some tips for improving your inventory days on hand
Optimize your inventory setup. Here is our guide to inventory management in terms of days on hand calculation.
What are inventory days on hand?
Inventory days on hand (DOH) is the average number of days your inventory stays in stock. It’s a measurement of how quickly you go through your stores, which means it’s also an indication as to how long money invested acquiring that inventory will be tied up.
When it comes to inventory, the average number of days you hold onto your products is a measurement of how liquid they are.
In the days on hand calculation, the lower your DOH, the better. A low DOH indicates that you are efficient with purchasing and selling inventory, which usually results in fewer storage costs for yourself. When a new shipment of goods arrives at your store, it is sold through quickly enough to prevent an accumulation of stock in the back room.
In my experience on days on hand calculation, a low DOH usually results in the dust on your shelves and slow inventory turnover.
Why is inventory liquidity necessary?
If you have a low inventory turnover, your customers will see the same products every time they come in. They’ll be less likely to shop with you and more likely to visit competitors that carry new items.
This helps you react quickly in meeting customer demands.
For example, if you’re a fashion retailer that sells clothing and accessories for trendy young women. If your inventory is liquid, then your money on it brings in new trends and brands to keep up with demand. But if your list isn’t selling well or quickly enough due to lack of liquidity, this can be detrimental because all the money spent on unsold goods will never turn back into revenue.
What is the connection between inventory turnover and inventory days on hand?
There is a correlation between inventory turnover and days on hand. Your daily calculation should be below if you have a high inventory turnover.
Inventory turnover is the number of times your inventory is sold and replaced in a particular period.It tells you if what you are doing to sell products on hand, like advertising or discounting, is working.
Inventory days on hand is a more detailed measurement than inventory turnover because it helps you predict how long your stock will last. If you know when to reorder, then this calculation becomes much more accessible.
How to calculate inventory days on hand
Inventory is calculated with this day on hand calculation formula:
The average stock is calculated by dividing the cost of goods sold over the number of days in an accounting period. The result tells you how many days’ worth of your business’s product is on hand.
To better understand how this works, let’s break it down.
When calculating your DOH, you first need to choose the length of time considered. The more extended period makes for a higher number and vice versa.
Then, it would help if you calculated your average inventory. This is done using this formula:
If you divide the beginning inventory by two and then do the same for the ending list, you will get an average number of stock items.
Your beginning inventory is the stock you had on hand at the start of a new accounting period. Your ending inventory is what’s left in your warehouse by that same date.
Finally, you need your Cost of Goods Sold (COGS) for the period. Go to Reports and then Totals by Date Range to find this in Lightspeed.
Once you know your numbers, plug them in, and the calculator will tell you how much money is owed.
The inventory turnover method
If you know your inventory turnover ratio, calculating the days of goods is a simple process.
If you divide the number of days in your accounting period by the inventory turnover ratio, that will give you how many days it takes for all your merchandise to be sold.
If you want to know your average days of inventory on hand per quarter, and you turn over your stock 3.3 times a day/month/quarter (or year), then divide 90 by the number of turns and see that on average, it would take 27.3 days worth of inventory for everything to sell out.
How to improve inventory days on hand?
If you have been looking at your inventory and feel that the DOH is too high, it might be because 60 days of list ties up revenue for a bit longer than necessary. This could make sense if you want to reduce this amount to 30.
You should also look at how much you are ordering and when. If it is too often, then this might indicate that your inventory will never change because the shelves will always be filled with overstocked items which means less new stock to offer customers.
I’ve also found that the best way to stock up is by adjusting reorder points, so you only order new inventory when necessary. The worst thing I can do as a business owner, especially during an event like winter holidays where demand for certain products spikes and waiting even one day might result in lost sales, is have too much product on hand.
After you’ve adjusted your reorder points and purchase sizes, there are a few things that might happen. You could have too much stock on hand or not enough.
- Offer discounts to clear out your inventory. The prospect of a sale is enough to get the attention of bargain-seeking customers.
- Bundle your inventory. If you have slow-selling items, get them moving by either pairing them with more in-demand products or running a buy one get one half off sales.
- If you have any excess stock sitting on your shelves for too long and is not being sold, donate it to a charity. This will help the company reduce its inventory levels while also helping others.
It can be hard to find what customers want when you have too much inventory. If there are ten days of stock and the order takes 14 days to arrive from the supplier, then we need more storage space – not less. That’s not a good situation.
Mastering your inventory helps you master your business
With the next step, I’ve set up a cloud-based system that will allow me to manage inventory better than ever before. If you are interested in learning more about how Lightspeed can help your business grow by managing its inventory efficiently, let’s talk.