Days' Sales in Inventory

In Management Accounting, Days' sales in inventory is also called Inventory Conversion Period. This is the measurement of time of converting bought or produced inventory into sales. It is important because by measuring this period, we can know whether it is more or less than normal period of conversion of inventory into sales. On this basis, we can take some good decisions.

It is good news if you see the short time period after calculation this. In short form, it is known as DSI. Following is its formula.

You can find inventory from balance sheet's closing stock and cost of goods sold from income statement.

For example, on above formula, it is 122 days but we have fixed stand is 100 days. Now, difference is 22 days. Now, we go to find the reasons behind this. Why did we not able to sell goods within the time limit of 100 days. Following may be the main reasons.

  • Our sales team is performing less. 
  • There is shortage of sales team. 
  • Market customers are buying our products less.
If we do not calculate above days through accounting ratio tool, we can not analyze the reason behind this. So, thanks accounting. Now, our managerial work is to motivate our sales team. Appoint new sales team. Motivate our customers for sales promotion. 

Long term benefits of calculating and Good decisions on this measurements

1.  Low the Cost 

This measurement is just any body test. If we diagnose the cancer in early age, we can treat it more fastly. Like this, if we measure it and take good decisions on this. Our conversion period will reach at lowest level. On this basis. we can decrease our inventory holding cost. 

2. Improve the Cash Inflow

We can improve our cash inflows. 

3. More Liquidity

If we have decrease these days, we can increase more liquidity. Inventory is the current asset and cash is also current asset. But cash is better than inventory because it liquid form and we can use it in emergency. 

4. Save From Theft and Fire

Inventory can be secure through deposit cash in bank. For its security, we need security gaurds. But still there is the risk of theft and fire. So, if days' sales in inventory is shorter, we can get benefit of saving inventory from theft and fire. 

Related : Days' Sales Uncollected






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Accounting Education: Days' Sales in Inventory
Days' Sales in Inventory
Accounting Education
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