Inventory Days on Hand: Optimizing Stock Management

As a retailer, the foundation of your business lies in your inventory. When your stock sits idle, so does your business. However, by strategically managing your inventory, you can maintain a steady cash flow and ensure customer satisfaction. Recognizing the importance of staying on top of your inventory performance is crucial.

Similar to grasping your inventory turnover ratio, knowing your inventory days on hand provides valuable insight into potential operational adjustments and is a key part of inventory management.

In this article, we will cover:

• The significance of inventory days on hand
• How to calculate your inventory days on hand
• Strategies to enhance your inventory days on hand

Let's get started.

What are inventory days on hand, anyway?

Inventory days on hand (DOH), also referred to as days of sales inventory, is the period your inventory remains in stock, typically measured in days. It signifies how swiftly you deplete your stock, essentially indicating how long the capital invested in your inventory remains tied up.

Essentially, inventory days on hand reflects your inventory's liquidity.

A lower DOH is generally preferable as it suggests efficient procurement, storage, and sales practices. With a low DOH, incoming inventory is sold promptly, preventing a buildup of stagnant stock.

Conversely, a high DOH indicates slow-moving inventory and a sluggish inventory turnover rate, meaning your shelves are filled with unsold products.

Why inventory liquidity matters

Inventory liquidity matters because it directly affects how happy your customers are and how well you can compete.

If your inventory doesn't move quickly, your customers will keep seeing the same old stuff every time they come in. That's not great for a retail business because they might start looking elsewhere for something new and exciting.

But if you can keep your inventory fresh and updated regularly, you'll keep your customers interested and coming back for more. Imagine you run a trendy clothing store for young women. If you can quickly sell through your inventory, you'll have the cash flow to bring in all the latest fashion trends, making sure your store stays hip and happening!

On the flip side, if your inventory just sits there gathering dust, you'll miss out on those hot new styles, and your store could start feeling outdated pretty fast. That's why having good inventory liquidity is crucial for staying ahead of the game.

The relationship between inventory turnover and inventory days on hand

The connection between inventory turnover and inventory days on hand is pretty clear-cut: they're like two sides of a coin, but they work oppositely.

When your inventory turnover is high, it means you're selling your goods swiftly and restocking shelves promptly. Consequently, your days of inventory on hand (DOH) should be low because you're not letting items linger around for too long. Inventory turnover is all about how efficiently you're moving your merchandise. If it's sluggish, it's a sign you might need to shake things up in your sales and inventory strategy.

On the other hand, inventory days on hand delve into the specifics of how rapidly you're clearing out your stock. It's like having a timer telling you when it's time to reorder because you know precisely how many days your current stash will last.

High turnover signifies hustling, while low DOH indicates keeping your inventory fresh and your customers satisfied.

Calculating inventory days on hand

You can determine your inventory days on hand (DOH) using the following formula:

Average Inventory/(Cost of Goods Sold/Number of days in your accounting period)=Inventory Days on Hand.

Let's break it down step by step.

• Choose your accounting period: Decide on the duration you want to calculate for, whether it's a year, quarter, or any specific period. This choice will influence the subsequent calculations. For instance, you'd use 365 days for a year, and for a quarter, you'd use 90 days.
• Calculate average inventory: Determine the average inventory by adding the beginning inventory to the ending inventory and then dividing by 2. The beginning inventory is the stock you had at the start of the period, and the ending inventory is what you had at the end.
• Find the Cost of Goods Sold (COGS): Obtain the COGS for the chosen period. If you're using software, you can generate a total report for the specified date range to find this value.
• Plug in the numbers: Once you have the necessary figures, plug them into the formula to obtain your DOH.

For example, let's say you're calculating for a quarter (90 days) and had a COGS of $100,000 with an average inventory of $30,000. First, divide the COGS by 90, which gives you approximately $1111.11. Then, divide the average inventory by this result, yielding a DOH of 27 for the quarter.

Using the inventory turnover method

Alternatively, if you're already familiar with your inventory turnover ratio, you can determine your DOH using this simplified formula:

Number of days in your accounting period/Inventory Turnover Ratio=Inventory Days on Hand

Here's how it works:

• Select your accounting period: Decide on the duration you're calculating for, whether it's a quarter, a year, or any specific period. This will be the number of days you use in the calculation.
• Calculate inventory turnover ratio: Determine your inventory turnover ratio, which represents how many times you've sold and replaced your inventory within the chosen period.
• Plug in the numbers: Divide the days in your accounting period by your inventory turnover ratio to obtain your DOH.

For example, let's say you want to find out your average DOH per quarter, and you typically turn your stock 3.3 times in a quarter. Simply divide 90 (the number of days in a quarter) by 3.3, yielding approximately 27.3 days of inventory on hand on average.

Strategies to enhance inventory days on hand and improve inventory performance

Optimizing inventory days on hand (DOH) is crucial for effective inventory management in any retail business. Let's explore some tactics to improve your DOH and overall inventory performance:

• Calculate inventory days: Begin by accurately calculating your inventory days on hand using the appropriate formula, considering the average inventory value and the number of days in your accounting period. This insight into your inventory balance allows for better inventory management decisions and helps in meeting customer demands efficiently.
• Inventory turnover ratio: Assess your inventory turnover ratio to gauge how effectively your company sells and replaces its inventory over a given period. A high inventory turnover indicates efficient inventory management, while a low ratio may signal excess inventory levels and potential holding costs.
• Inventory management software: Implementing the right software can streamline inventory tracking, reorder points, and supply chain management. This software enables you to optimize inventory days, reduce excess stock, and effectively meet consumer demand, ultimately enhancing cash flow and profitability.
• Reducing excess inventory: Address excess inventory promptly to minimize excess inventory costs and storage expenses. Offer discounts, bundle slow-moving items, or consider donating obsolete inventory to mitigate financial losses and improve inventory liquidity.
• Strategic reordering: Adjust reorder points and purchase sizes to align with consumer demand and optimize inventory levels. Strategic reordering ensures you replenish stock only when necessary, reducing the risk of overstocking and lost sales.
• Balancing inventory levels: Strike a balance between inventory turnover and inventory days on hand to optimize inventory performance. While high inventory turnover boosts cash flow and profit margins, maintaining optimal inventory days ensures that you meet customer demand without incurring excessive storage costs.

By focusing on these strategies and leveraging the right inventory management tools, you can enhance inventory days on hand, meet consumer demand more efficiently, and increase profitability in your retail business.

How can a Retail POS improve inventory days on hand?

Implementing a robust point of sale (POS) system tailored for retail operations can significantly enhance inventory management practices and improve inventory days on hand (DOH). Here's how a retail POS can make a difference:

• Real-time inventory tracking: Inventory management integrated in your POS system provides real-time visibility into inventory control levels, enabling retailers to monitor stock movements accurately. With instant updates on sales and stock replenishments, businesses can make informed decisions to maintain optimal inventory levels and minimize excess stock, thereby improving DOH.
• Automated reordering: Advanced POS systems offer automated reorder functionalities based on predefined inventory thresholds. By setting reorder points and stock levels within the POS, retailers can ensure timely replenishment of inventory when levels fall below-specified thresholds. This proactive approach helps prevent stockouts and reduces the risk of overstocking, improving DOH.
• Sales and inventory integration: Integrating sales and inventory management modules within a retail POS streamlines operations and facilitates better inventory control. By analyzing sales data with inventory levels, retailers can identify trends, forecast demand more accurately, and adjust stocking levels accordingly. This synergy between sales and inventory management contributes to optimizing DOH and aligning inventory levels with consumer demand.
• Efficient order fulfillment: A retail POS system with integrated order management capabilities streamlines order fulfillment processes, ensuring efficient handling of customer orders and minimizing fulfillment delays. By fulfilling orders promptly and accurately, retailers can reduce order processing times and improve inventory turnover, ultimately enhancing DOH by maintaining optimal inventory levels.
• Inventory performance analytics: Many modern retail POS systems offer comprehensive reporting and analytics features that provide insights into inventory performance metrics, including DOH. By analyzing inventory turnover rates, stock movement patterns, and historical sales data, retailers can identify areas for improvement, fine-tune inventory management strategies, and optimize DOH to meet consumer demand effectively.

Inventory days: your retail triumph

Your inventory is your retail heartbeat. It fuels your business, but when it stalls, so does your success. Smart inventory management keeps cash flowing and customers satisfied.

DOH isn't just a number. No, it's your business agility in action. It shows how fast you move goods and respond to customer needs. A lower DOH means smoother operations and happier customers.

In this journey to optimize inventory, we've explored DOH's importance, its link to inventory turnover, and actionable strategies. From calculating DOH to leveraging inventory management software, each step aims to keep shelves stocked and customers happy.

And with a robust Point of Sale (POS) system by your side, managing inventory becomes a breeze. Real-time tracking, automated reordering, and seamless integration make stock management a cinch.

So, as you tackle DOH improvement, remember: it's not just about inventory but retail triumph, too. Armed with the right tools and strategies, you can turn your inventory into a catalyst for success. It's time to make inventory your retail triumph!

Liked this blog? Check out our additional resources, including our inventory cycle count guide, our how unsold inventory affects tax guide, and our how to calculate end of year inventory guide.