CIMA F1 Syllabus D. Management Of Working Capital And Cash - Inventory days - Notes ^{1 / 5}

Illustration:

Opening inventory - $6m 

Closing inventory - $4m 

Cost of sales - $38m 

What is the inventory days?

It is calculated as (Inventory / Cost of sales) x 365 

First, lets calculate the average inventory.
($6m + $4m) / 2 = $5m

Inventory days = 5/38 x 365 = 48 days

Explanation of Inventory Days:

• A financial measure of a company’s performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales.

• Generally, the lower (shorter) the better, but it is important to note that the average varies from one industry to another.

  This measure is one part of the cash conversion cycle, which represents the process of turning raw materials into cash.

An increase in inventory days could be due to:

1. Obsolescence

2. Economic downturn

3. A strategy of stockpiling goods

4. Increase in shelf life of products

A decrease in inventory days could be due to:

1. Price reductions to encourage sales