Know your Stock Days
Quite often we relate to our inventory holdings purely as a dollar number. So at any point in time we know the dollar value and use that as our guide as to whether the value is currently appropriate to our trading. By using this "dollar" Inventory number you still need to mentally ascertain whether the current holdings are appropriate or not and that determination will be based on historical data and your past knowledge of trading and trading cycles.
There is a better measure. One that quickly relates to day to day operations, that is, Stock Days. Stock days gives you the number of days inventory you have on hand to fulfil future sales orders based on current levels of inventory consumption. Ideally the calculation is conducted on an annual basis, this helps with fluctuations in seasonal trends. With this in mind however, Stock days can comfortably be ascertained on a monthly basis. A measure on a monthly basis also provides some measure of accountability as to the buying cycle of your inventory holdings. To consider whether your KPI is appropriate have a look at "Can my KPI be wrong"
Calculation of Days Inventory is pretty straight forward and makes an ideal Liquidity KPI for financial analysis. The annual calculation is:
Inventory days = 365 x (Ave Inventory/Cost of Goods Sold)
For monthly measures adjust 365 (being annual days) to a rough monthly days average. And obviously monthly cost of good sold.
Inventory can also be coupled with sales as an appropriate yardstick for resource allocation. Kpi benchmarks for a Sales to Inventory ratio will also identify excess stock levels to current sales demands. To calculate: Sales / Inventory. Used consistently, an appropriate identifiable benchmark can be set to develop target inventory levels based on expected sales ensuring efficient use of liquid resources.
Inventory holdings can be a great bottomless pit for your cash flow. Managed properly with good current information will certainly assist you putting a lid on that pit. Managing these KPIs has never been easier with ezzykpi.com. Get a board with a free trail and give it a go.