Average Age of Inventory

What Is the Average Age of Inventory?

The average age of inventory is the average number of days it takes for a firm to sell off inventory. It is a metric that analysts use to determine the productivity of sales. The average age of inventory is likewise alluded to as days' sales in inventory (DSI).

Formula and Calculation of Average Age of Inventory

The formula to work out the average age of inventory is:
$\begin &\text= \frac \times 365 \ &\textbf \ &C = \text \ &G = \text{The cost of goods sold (COGS)} \ \end$

Everything that the Average Age of Inventory Can Say to You

The average age of inventory lets the analyst know how fast inventory is turning over at one company contrasted with another. The faster a company can sell inventory for a profit, the more profitable it is. Be that as it may, a company could utilize a strategy of keeping up with higher levels of inventory for discounts or long-term planning efforts. While the measurement can be utilized as a measure of proficiency, it ought to be confirmed with different measures of productivity, for example, gross profit margin, before making any ends.

The average age of inventory is a critical figure in industries with quick sales and product cycles, like the technology industry. A high average age of inventory can show that a firm isn't as expected dealing with its inventory or that it has an inventory that is challenging to sell.

The average age of inventory assists purchasing agents with settling on buying choices and managers pursue pricing choices, for example, discounting existing inventory to move products and increase cash flow. As a firm's average age of inventory increases, its exposure to obsolescence risk likewise develops. Obsolescence risk is the risk that the value of inventory loses its value over the long haul or in a soft market. In the event that a firm can't move inventory, it can take a inventory write-off for some amount not exactly the stated value on a firm's balance sheet.

Illustration of How to Use the Average Age of Inventory

An investor chooses to look at two retail companies. Company A claims inventory valued at $100,000 and the COGS is $600,000. The average age of Company An's inventory is calculated by partitioning the average cost of inventory by the COGS and afterward increasing the product by 365 days. The calculation is $100,000 partitioned by $600,000, increased by 365 days. The average age of inventory for Company An is 60.8 days. That means it requires the firm around two months to sell its inventory.

Alternately, Company B likewise possesses inventory valued at $100,000, however the cost of inventory sold is $1 million, which decreases the average age of inventory to 36.5 days. On the surface, Company B is more efficient than Company A.

Highlights

• The faster a company can sell its inventory the more profitable it tends to be.
• The average age of inventory is otherwise called days' sales in inventory.
• The average age of inventory tells what amount of time on average it requires for a company to sell its inventory.
• This measurement ought to be confirmed with different figures, like the gross profit margin.
• A rising figure might recommend a company has inventory issues.