Average Days of Inventory on Hand

For selling any  product, we need large quantity of that product. For producing that product, we need large quantity of raw material. Both product and raw material are inventory. Both are the part of our current assets and working capital. For effect use of this working capital, we have to check the time period in which we will hold the inventory before selling or producing the product. This time period is average days of inventory on hand. It is also called inventory conversion period. If average days of inventory on hand are very small, it means, we have power to sell or produce the product fastly. At that time, we need low amount of working capital for investing in inventory. Saved working capital can be utilized for other purpose. High average days of inventory on hand indicate the low production or selling. We can investigate the reason after calculating this ratio.

Following is its formula = 365 / Inventory turnover ratio

or = 365 / cost of goods sold / Average inventory

or = 365 / cost of goods sold / opening stock of inventory + closing stock of inventory / 2

or = Average inventory  X 365 / Cost of goods sold