Definition:
Average Days to Sell Inventory is a financial ratio that measures the average number of days it takes a company to sell its inventory. It’s a key indicator of a company’s inventory management efficiency and its ability to generate sales.
Formula:
Average Days to Sell Inventory = (Average Inventory / Cost of Goods Sold) * 365
Why is Average Days to Sell Inventory important?
- Inventory Management: A lower average days to sell inventory indicates efficient inventory management, as the company is selling its inventory quickly.
- Cash Flow: A lower average days to sell inventory can improve cash flow by reducing the amount of capital tied up in inventory.
- Profitability: A high inventory turnover (which is the inverse of average days to sell inventory) can contribute to higher profitability.
A lower average days to sell inventory is generally desirable, as it indicates that the company is effectively managing its inventory and generating sales. However, it’s important to consider other factors, such as industry standards and the company’s business model, when interpreting this ratio.
