The duration, generally measured in days, it takes for a company to convert its inventory into sales. It represents the average number of days inventory remains in the company’s possession. A lower figure typically indicates efficient inventory management and strong sales, while a higher figure might suggest slow-moving inventory, overstocking, or potential obsolescence. For instance, if a company’s cost of goods sold is $1 million and its average inventory is $100,000, the resulting ratio is 0.1. Inverting this ratio (1/0.1 = 10) and multiplying by 365 days provides an approximate indication of inventory holding duration.
This metric is a key performance indicator (KPI) that provides insight into a companys operational efficiency and liquidity. Efficient inventory management positively impacts cash flow and profitability. Historically, companies have used this calculation to benchmark against industry peers and identify areas for improvement in their supply chain processes. Accurate assessment enables businesses to minimize holding costs, reduce the risk of spoilage or obsolescence, and optimize their working capital.
