On hand inventory is the amount of inventory that a company owns and has in stock. The purpose of on hand inventory is to have the correct amount of product to meet the demand from customers.
A company needs to know how much of on hand inventory it has because if there is not enough, it can lead to lost sales and unhappy customers. If it is too much, then it will cost money to store the extra product.
Why On-Hand Inventory Is Important
On-hand inventory is an essential information for companies. It provides information on how to improve their day-to-day processes from the internal workflow to the final product. Here’s why:
- It allows a company to efficiently manage the supply chain by knowing exactly how many units it has on hand at any given time. This can help to avoid running out of stock or having too much stock that a business can’t sell at full price because it’s overstocked.
- It provides information about when a company should order more stock so that it arrives before customers need it, which reduces the risk of running out of stock (and therefore losing sales).
- It helps a company to forecast demand for future products or services. This enables companies to accurately predict their financial performance, including cost savings from buying in bulk and revenue growth from selling more items per customer visit.
How To Calculate It
Here’s the formula you need to use in order to calculate the inventory days on hand.
Value of inventory = value of inventory at the beginning of the period – the value of the inventory at the end of the period
Cost of goods sold = (Beginning Inventory + Purchases) – Ending Inventory
The number of days includes the average number of days in the accounting period that needs the DOH needs to be calculated.
Example of DOH
Let’s dive into an example to get a better idea of how you can put the formula into practice!
Let’s assume that you run a business with an ecommerce and physical store. Now you need to find out how long it takes your business to sell its inventory during the first quarter of the year. In order to find more information about that, your run into your POS reports. There, you can find the value of the inventory sold from January to March. The beginning value of the inventory was $50,000 whereas the value of the inventory that was left at the end of the quarter was $3,000.
Therefore, the value of the inventory is equal to $3,000. According to your POS reports
- the cogs during that time were $50,000
- the number of days in question is 90
So here’s the updated formula:
Inventory Days on Hand= ($3,000/$50,000) x 90= 5
Thus your DOH=5 which means that 5 days are needed to sell your inventory