How do you calculate inventory days?

The short answer

Inventory days (stock days) = closing stock at the month end ÷ cost of sales for the last three months × the number of days in those months.

It is roughly how many days of sales the business holds on its shelves. Fewer days means less cash tied up in stock.

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Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.

A distributor holding AED 1,380,000 of stock carries about 31 days of it

An invented kitchenware distributor holds AED 1,380,000 of stock at the end of September. Its cost of sales for July to September was AED 4,140,000, over 92 days.

Inventory days = 1,380,000 ÷ 4,140,000 × 92 = 30.7 days

Divide by cost of sales, not by revenue

Stock is carried at cost, so it is compared with cost of sales. Dividing by revenue mixes the profit margin in and understates the days: for a business with a 30% gross margin, by about 30%.

Inventory days is only as good as the month-end stock figure

Many small businesses count stock only at the year end, so the trial balance carries last year's closing stock all year. Gross margin and inventory days then mean little from one month to the next. In order of accuracy:

Count or value stock every month.
Use the stock system's own valuation, where there is one and it is posted monthly.
Estimate cost of sales from a standard margin and correct it at the count, saying so in the report.

Magic MIS asks each company how its closing stock is valued: monthly, quarterly or yearly. Where it is counted quarterly or yearly, the board says a single month's gross profit isn't meaningful and leads with the quarter or year to date instead.

What pushes inventory days up

Buying ahead of a price rise or a season: it should come back down.
Slow-moving or dead stock: the number creeps up month after month; the stock ageing report shows where.
Sales falling while purchasing carries on as before.
Supply problems that made the business hold more safety stock.

Read it with debtor days and creditor days

The cash conversion cycle = inventory days + debtor days − creditor days. If stock sits for 31 days, customers pay in 45 and suppliers are paid in 35, cash is tied up for about 41 days. See debtor days and creditor days.

What is normal depends entirely on the trade: days for fresh food, one to three months for many distributors, far longer for spare parts or jewellery. Track the business's own trend, and compare with the same month last year to allow for seasons.

Four ways inventory days misleads

Year-end stock used all year. Gross margin and stock days both become fiction.
Dividing by revenue. Use cost of sales.
Ignoring goods in transit. Stock you own but haven't received still ties up cash.
Obsolete stock not written down. Dead stock inflates the balance sheet and the days.

Magic MIS computes it every month, the same way

Magic MIS computes inventory days as closing inventories ÷ the direct costs of the last three months × the days in them, beside debtor days, creditor days and the cash conversion cycle. Each figure opens to the stock and cost ledgers behind it.

What people ask about inventory days

Is inventory days the same as stock turnover?

They are two views of the same thing. Stock turnover is cost of sales ÷ stock, in times per year; inventory days is the number of days that turnover takes.

Should I use average stock or closing stock?

Closing stock is simpler and matches the month-end balance sheet; average stock smooths a seasonal business. Pick one and keep it. Magic MIS uses closing stock.

What if the business holds no stock?

Then inventory days does not apply. Professional firms track WIP days instead: the time between doing work and billing it.

Have inventory days computed from your trial balance

Create an account, load last month's trial balance, and get the report — paid per action.

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