2017-03-15 00:00:00Decision MakingEnglishEliminate the agency problem in your business by requiring full transparency, limiting the agent's power, and removing financial incentives...https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Woman-at-meeting-discusses-conflicts-of-interests-with-employees.jpghttps://quickbooks.intuit.com/ca/resources/decision-making/conflict-of-interest-resolving-agency-problem/Conflict of Interest: Resolving the Agency Problem

Conflict of Interest: Resolving the Agency Problem

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Days sales in inventory, or DSI, measures the number of days it takes for your company to sell all of its inventory. The calculation also shows how many days your company’s inventory lasts into the future. Knowing this calculation helps you to quantify your business’s overall value and determine how quickly you turn assets into cash.

Calculating Days Sales in Inventory

The formula for DSI looks like this:

Days sales in inventory = (Value of your ending inventory / cost of goods sold) x number of days under review

The period of review refers to how many days you reviewed the ending inventory and cost of goods sold, such as a 31 days in a month, 90 days in a quarter, or 365 days in a year. The cost of goods sold measures the direct costs that go into the inventory, such as raw materials, labour, and storage costs.

For example, your ending inventory comes to $500,000, cost of goods sold is $100,000, and the period in review is 31 days.

The days sales in inventory comes to:

$500,000 / $100,000 x 31 = 155 days

This shows that your inventory should stay on your shelves for 155 days. If these same dollar amounts happened over 365 days, then the days sales outstanding comes to 1,825 days.

Take a look at what happens to this 31-day period when your COGS is higher than your inventory value:

$500,000 / $1,000,000 x 31 = 15.5 days

This result means you sell your inventory in a faster time than the time period for which you reviewed your inventory. This represents a very favorable result because you have high demand for your products and the price is right.

How Days Sales in Inventory Creates Forecasts

The lower the days sales outstanding, the faster you convert goods into sales and cash. Typically, you should aim to have the value of this metric at about 90 days. The lower the number, the faster your inventory goes out the door to customers. This lets you build forecasts based on demand for your goods, pricing models, and the amount of supplies or raw materials you need to bring in. If your inventory turns over faster than before, you may have to order more supplies.

You might need to increase the hours your employees work or hire more help if you need to produce more goods in a short amount of time. Knowing the days sales in inventory also gives you an opportunity to gauge staffing levels during busy periods or lulls.

QuickBooks allows you to track expenses and income, along with creating custom reports, that gauge the overall health of your business. As many as 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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