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Days in Inventory Formula (Formula, Calculator) | Excel Template - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of wallstreetmojo since today we are
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going to learn component of ratio
analysis which has Days in inventory
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formula let's understand this as you can
see the formula over here days in
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inventory formula is 365 days divided by
the inventory turnover so this is the
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ratio you are dividing 365 by the inventory turnover ratio let's understand this
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days in inventory formula what exactly
we are talking. See days in inventory a
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formula tells you about how many days
how many days it takes for a firm to
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wait for it to convert its inventory
into sales right let's have a look at
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the formula for the days in inventory
the days in inventory is equal to 365
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days divided by inventory turnover right
so as you can see we need to know the
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inventory turnover ratio before the days
in inventory calculation so the
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inventory turnover formula goes
something like this
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is equal to your COGS / ending
inventory you can take average also
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that's fine so now the cost of the goods
sold can also be divided by the average
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inventory okay and that is the average
of the beginning and the ending
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inventory to find out the inventory
turnover ratio now let's take the days
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in the inventory turnover ratio example
a practical example how so that you know
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will have a crystal clear idea about how
the formula works now let's say let's
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take a example and let's say this
there's this guy called John John wants
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to know the inventory days of the company
and he has couple of he has gathered
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couple of details like you know the
beginning inventory inventory of the
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year for if he has collected as $40,000
and the ending inventory is let's say
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$60,000 the cost of the goods sold 1/3
the COGS is equal to let's say 3 lakh
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what what he has collected
and your consist of 365 days okay then
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find out the days of inventory for John
so first we need to calculate the
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average inventory now we know that the
beginning and the ending inventory of
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the year so we'll use a simple average
to find out the average inventory of the
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year the average inventory is going to
be your opening inventory + closing /2
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right so that's going to be 50,000
that's that's a $50,000 your average
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inventory now the inventory turnover
ratio is going to be COGS that is your
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cost of goods sold dived by your
average inventory right we'll give you
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six times so you can find out the day's
the inventory days as simple as that
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shouldn't be much of a hazal over here
inventories is equal to your 365 days
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that is number of days in year / the inventory turnover ratio that will
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give you 60.833 so this is remember
one thing this is times and this is days
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okay so make sure what you are
interpreting so we are interpreting in
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terms of days so this is 61 based aprox
now you have got the real idea about how
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the things have been calculated the
formula the calculation but what about
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the explanation part you shouldn't be
just learning the formula you listen you
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just shouldn't be calculating the the
numbers but at the same time you should
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know how to interpret it right so
there's an inventing formula is used to
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see how many days the form takes to
transform its inventor into finished
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goods right since the major part of days
in inventory formula includes inventory
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turnover ratio right ITR
right we need to understand the
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inventory turnover ratio to comprehend
the meaning of the inventory is formula
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now the inventory turnover ratio the IT
o helps or ITR helps us to understand
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the efficiency of the company to handle
the inventory it shows that how good the
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company is
is is to reduce the overspending on the
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inventory and also how will the company
can convert the inventory into the
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finished stocks now for example if you
forms inventory turnover ratio is let's
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say 10 10 times it means that the form
turns the inventory in to inventory into
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finished goods 10 times you're okay and
there comes the value of the inventories
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formula so if we consider there are
let's say 365 days okay in a year we can
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see that the days it takes for the form
to transform the inventory into finished
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goods or the finish stock so all we need
to do is to divide 365 divided by 10
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times that will give us 36.5 days
in inventory to transform the inventory
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to theif finish goods this is what the
interpretation goes right now let's
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understand what is the use or the or we
can consider what exactly is the
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importance so we can derive the formula
for days in inventory by including the
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number of days of the year with the
inventory turnover ratio if we ever
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wanted to know about the efficiency of
the inventory management of the firm of
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the firm you should look at both the
inventory turnover and the inventory
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days okay so by trying to find out the
inventory days you would be able to
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calculate both of the above ratio now by
using the formula for days in inventory
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you will get to know that how much
firm takes down there to manage deal or to
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transform the transform these things
into inventory into basically into
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inventory into finished goods now this is
basically the calculator that you can
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actually apply in your case there are
365 days okay which if you want you can
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change it to 360 but here we are not
allowed to change let's say we are just
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taking 365 days if your inventory
turnover ratio is 10 that means 37 days
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you are taking to convert your you can
say your inventory into finished goods
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right so what analysis that we can make
we'll try and we'll try and understand
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that let's say of if our inventory
turnover ratio goes to eight okay we'll
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start with 10, 8 and 12 will
make three analysis over here if it is
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10
what is the result that we get 37 right
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so 37 days it takes this are days this
are times right if it is 10 times it
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takes 37 days if it is 8 times it takes
46 days so as the ratio goes down it
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means the number of days to convert is
going up and as we move to 12 it moves
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on to moves down to 30 days so you
invented turnover ratio or the t's sorry
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the days in payable is reducing if your
inventory turnover ratio goes up so
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higher the inventory turnover ratio
lower is going to be the days in the
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inventory formula so let's make some
analysis over here inventory turnover
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ratio and days in payable days in
inventory turnover ratio so what do we
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see we see that if your inventory
turnover ratio is higher your days in
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inventory is going to be lower and if
your inventory turnover ratio is lower
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then your days in inventory is going to
be higher so what we can see there is an
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inverse relationship between the
inventory turnover ratio and day days in
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inventory right and this case is good
the higher inventory turnover ratio
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means that there are own there aren't
lower number of days in which the
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inventory staying in the company order
firm so this is a good situation and
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this is the bad situation so always a
company or a firm should strive for
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this particular case and every company
always goes for this why not why someone
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wants their inventory to be tied up and
remember one thing if there are some
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obsolete inventory which let's say due
to the change in the fashion or thus
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taste in the market then absolutely this
case is going to come in that scenario
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quick decisions are going to help you
thank you everyone
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