Retailers often face costly inventory problems, like having too much stock in their warehouse or selling out of popular products.
Knowing how long a product stays in inventory, however, can help retailers better meet consumer demand, lower storage costs, and improve inventory management.
Inventory days on hand (DOH) measures how long it takes to sell a company’s inventory. Read on to learn how to calculate DOH and why you should aim to improve yours in 2023.
What is inventory days on hand?
Inventory days on hand (or days of inventory on hand) is how many days, on average, it takes for you to sell inventory. Financial analysts use it to understand how efficiently you manage inventory dollars.
Inventory usually represents a retailer’s largest asset or liability on the balance sheet; for every dollar US retailers make, they have $1.39 of inventory in stock.
Inventory days on hand is an important way of understanding how long merchants have cash tied up in stock. Some retailers call it days inventory outstanding (DIO). The value it holds is a measure of the company’s liquidity.
It’s also a helpful metric to have when reviewing inventory turnover rates. For instance, if your business’s DOH is 30 days, that means it takes a month to sell all your in-stock goods.
Once they have established this measurement, merchants can optimize their procurement and sales cycles to shorten it. The more quickly a merchant sells their available inventory, the faster they will see a return on their investment.
A low DOH, then, indicates efficiency, high profitability, good inventory management, and effective forecasting of inventory needs. A high figure requires improvement because it means that stock sits on the shelves or in storage for a long time. It’s a hallmark of inefficiency, low profits, and poor demand forecasting.
How to calculate inventory days on hand
Inventory days on hand formula
Inventory Days on Hand = (Value of Inventory / Cost of Goods Sold) x Number of Days
This formula includes the following metrics:
Value of inventory
Value of inventory = Value of Inventory at Start of Time Period - Value of Inventory at End of Time Period
While this is the typical way to calculate inventory value, some businesses may use different averaging techniques, such as the daily average inventory value over a 90-day period.
Cost of goods sold
Cost of goods sold = (Beginning Inventory + Purchases) – Ending Inventory
Cost of goods sold (COGS) is the direct cost of producing products sold by your business. COGS includes the cost of materials and labor directly related to the production and manufacturing of retail products.
Number of days
Number of days = The average number of days in the accounting period you want to calculate DOH for. This is usually a month, a quarter, or a year.
Example of calculating inventory days on hand
Let’s say you run a beauty brand with an ecommerce store and brick-and-mortar, and want to know how long it typically takes your business to sell its inventory each quarter.
You’re interested in first-quarter sales, so you refer to your POS reports to find the value of the inventory you sold from January through March. The beginning value of your inventory was $50,000 and the value of the inventory you had left over at the end of the quarter was $5,000.
So, your value of inventory is $5,000.
According to your POS reports, the COGS for the beauty products you sold during that time was $30,000.
Since your online store sells products seven days a week and you’re analyzing DOH over a quarter, the number of days in question is 90.
Now we plug those numbers in to the DOH formula:
Inventory Days on Hand = (Value of Inventory / Cost of Goods Sold) x Number of Days
Inventory Days on Hand = ($5,000 / $30,000) x 90 = .167 x 90 = 15
Your DOH is 15, which means it takes 15 days for you to sell your inventory.
Strategies for improving inventory DOH
If your DOH is higher than you want it to be, there are several things you can do to reduce it, including:
- Using inventory management software
- Strengthening relationships with suppliers
- Offering markdowns and bundles
- Donating unsold inventory
Use inventory management software
Inventory management software improves efficiency by using historical sales data to forecast inventory needs. That way you order the correct quantity of stock and sell inventory more quickly.
Software is also vital for streamlining omnichannel inventory. Merchants that both run brick-and-mortar stores and sell online need software to provide a complete picture of inventory levels.
Strengthen relationships with suppliers
Efficient supply chains and collaboration with suppliers are critical to a low DOH. When retailers work with responsive suppliers, they can hold a lower amount of inventory and rely on the supply chain to restock their stores quickly in the event of an unexpected spike in demand.
If there are shortages or delays in the supply chain, however, the retailer may have to hold extra inventory (safety stock) to protect itself from demand fluctuations.
Offer markdowns and bundles
Retail markdowns help you shift stock––improving your DOH and lowering holding costs. Review your POS reports to see which items have been in stock the longest or which product sales have stagnated to determine what to put on sale.
If customers need more incentive, try putting discounts on bundled items. Bundling can be an effective cross-selling technique to get stock moving.
Donate unsold obsolete inventory
Sometimes it’s best to cut your losses and donate any unsold deadstock. Doing so will cut your business’s holding costs and allow you to focus on acquiring more profitable stock.
According to the National Retail Federation, “People are looking for a meaningful connection to the brands they support.” Donating stock can help you better connect with customers who value the same causes as you.
Plus, in most cases, you’ll be able to use the donation as a tax write-off.
Why is it important to understand inventory days on hand?
Understand operational performance
DOH provides retailers with a bird’s-eye view of their operational performance. It can highlight inefficiencies in supply chains and inventory management systems.
For instance, large fluctuations or changes from historical averages may indicate supplier problems like inventory not being replenished due to supply chain disruptions or demand spikes due to seasonality.
Knowing these data points help retailers optimize their operations.
Prevent stockouts and overstocking
Stockouts are a big revenue loser. They frustrate customers, damage brand reputation, and result in lost opportunities to make profits.
Overstocking is another expensive inventory management problem. Having too much stock means your cash is tied up in inventory your business can’t shift; it also results in higher warehousing costs.
Knowing how long, on average, it takes your store to sell through its inventory helps you build automated reorder points so you can replenish SKUs and match customer demands.
Fluctuations in DOH, or a DOH that’s higher than your benchmark, can indicate inefficiencies in how you manage inventory. By tracking inventory days on hand, you’ll improve your inventory management systems and more accurately forecast when you’ll need to reorder stock.
Ultimately, with fewer inventory days on hand, you’ll have higher profits because you’re getting the money back you invested in stock. Plus your business will enjoy better cash flow, as it won’t have so much working capital tied up in excess inventory.
If you’re looking for investors for your retail business, they’ll want to know your DOH and inventory turnover ratio. These metrics demonstrate your efficiency at selling and managing inventory.
Predict storage costs
DOH shows you how long you can expect to hold stock before making a sale, so you can estimate your inventory storage costs. With a low DOH, businesses can downsize to a smaller, less expensive warehouse or storage unit and increase their profit margins.
Optimize your days in inventory numbers
Maintaining a low inventory days on hand should be a priority for all retail businesses. With effective inventory management, you can lower storage costs as well as prevent stockouts and overstocks from harming your business.
Along with profitability, sell-through rate, inventory turnover ratio, and other key performance indicators, inventory days on hand is a critical metric that indicates how well your business is doing.
Calculate DOH regularly, and then evaluate what you can do to lower it and increase profits.
Inventory days on hand FAQ
How do you calculate inventory days on hand?
To calculate inventory days on hand, use the following formula: Inventory Days on Hand = (Value of Inventory/Cost of Goods Sold)*given period of days
What is a good inventory days number?
A good inventory days number depends on each retail segment. For example, retailers selling perishable products will have a lower DOH and high inventory turnover ratio, while luxury brands selling items like jewelry will have the opposite.
Should days of inventory on hand be high or low?
Generally, a lower days of inventory on hand (DOH) is preferred because it indicates efficient inventory management and faster turnover.
How many days of inventory should I carry?
The optimal number of days of inventory to carry varies by business. It depends on time of year, average days sales, and industry. Ideally, you want to maintain stock levels to meet customer demand and minimize storage costs and the risk of goods becoming obsolete.