How to Calculate a Day's Supply of Inventory

Calculating A Day's Supply of Inventory

A day's supply of inventory is how long a company's average supply of inventory will last. This information is particularly useful in inventory planning. Most companies want to decrease this amount because keeping inventory increases costs -- from storage and stocking to costs associated with spoilage of inventory.

Instructions

1. Calculate the company's average inventory by adding beginning inventory and ending inventory, then dividing by two. Beginning and ending inventory is on the company's balance sheet. For a company that had beginning inventory of $500,000 and ending inventory of $550,000, their average inventory equals $525,000.

2. Calculate the cost of a day's sales by dividing cost of sales by 365. Cost of sales is on the firm's income statement. For example, a firm's cost of sales is $10 million. Divide $10,000,000 by 365 which equals $27,397.26 per day.

3. Divide average inventory by cost of day's sales. In the example, $525,000 divided by $27,397.26 equals 19 day's supply of inventory.

References

• University of Houston: Inventory Metrics