Inventory days for your Business Plan
The inventories of a business are the total of raw materials, work in process, and finished goods that the business holds for resale. Inventory days is the average number of days sales which the business is holding in inventories. It is calculated by dividing the value of inventories by the average daily cost of sales. Additionally it is sometimes referred to as days inventory outstanding, days sales in inventory, or stock days.
The inventory days formula or ratio is shown below.
Inventory days in the Financial Projections Template
Our financial projections template uses inventory days to calculate the year-end inventories based on the projected annual cost of sales
Inventory = Inventory days x (Annual cost of sales / 365)
Additionally our free days inventory calculator can be used to calculate a value for inclusion in the financial projections template.
Established Business Plan
For an established business, the number of days can be calculated from the latest set of accounts. The figures to use are the value of inventories from the balance sheet of the business, and the value of the cost of sales from the income statement.
To illustrate suppose the annual cost of sales is 90,000 and the inventories are 12,000. In this case the days calculation is as follows.
Inventory days = Inventory / Daily cost of sales Inventory days = Inventory / (Annual cost of sales / 365) Inventory days = 12,000 / (90,000 / 365) = 48.7 days
As can be seen this means that on average the business holds sufficient inventories to satisfy 48.7 days sales.
If the income statement is not for a full year, then divide the cost of sales for the period by the number of days in the period. This will give the average daily cost of sales over that period.
Startup Business Plan
The inventory days for your business will depend on the type of industry in which it operates. A predominantly cash based business might have a very low days inventory, in the order of a few days. In contrast a manufacturing business holding substantial levels of raw materials and work in process might have days in the region of 90 days or higher.
The figure to use for the inventory days is the average for the industry. If industry averages cannot be found, then use the published accounts of similar businesses or competitors, and carry out the calculation described above for established businesses.
Ultimately, the value of inventories held and therefore inventory days will depend on the lead time from your suppliers. Consequently procedures need to be in place to ensure this adhered to as part of the business plan.
Having entered the inventory days, the template calculates the inventories at the end of each subsequent year by multiplying the inventory days by the average daily cost of sales for the year.
Inventory = Inventory days x (Annual cost of sales / 365)
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to determine the days payable outstanding for use in the projected balance sheets.
This is part of the How to Create Financial Projections Guide. The guide is a series of posts on how our template is used to produce simple financial projections.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.