Question

NB: Previous answer was rejected as it was a cut and paste from Google.

Question:

Explain "Days of Inventory on Hand" and discuss the implications if the "Days of inventory on hand" show an increase annually ( 2 paragraphs answer)

Days of Inventory on Hand

54.95

53.72

55.29

60.48

63.48

59.03

63.50

67.61

66.28

64.67

66.90

Answer 1

Solution-

"Days of Inventory on Hand" is also known as "Inventory Days on Hand". The basic meaning of this is how quickly a business uses up its inventory levels on average, in simple language it means for how much time the inventory is with business itself. Managing inventory is becoming an important task day by day for business itself. The main reason or cause behind Inventory management is by computing the Days of Inventory on Hand, a company is able to know just how long its cash remains tied up in its stock. As a smaller Days of Inventory on Hand means the company is performing better. Ideally, it means that the company is using its inventory more efficiently and frequently, which can result in potentially higher profit.

DOH (Days of Inventory on Hand) can be easily calculated by a simple formula, just by dividing the average inventory by Cost of Sales/No. of Days.The very Important reasons that an inventory mangement is important for the business organisation are-

• Lower costs-The fewer inventory days on hand you have, the less money you need to spend on warehousing and your upfront inventory investment. Of course, depending on where your inventory is stored can also affect your inventory storage costs (for example, using a 3PL like ShipBob that lets you split your inventory between fulfillment centers to ship orders from the location closest to your customer to reduce shipping costs).
• Faster profits- If you can reduce your inventory days on hand (meaning, speed up the rate at which you deplete inventory), you’re moving inventory quicker, and thus making your money back quicker.
• Fewer stockouts- Having an accurate inventory days calculation available lets you set up accurate reorder points and have the right amount of stock available, whenever you need it. With fewer stockouts, you can ensure a consistent customer experience and prevent out-of-stock notices to your customers.

As mention above in question itself the different rates of DOH-

Days of Inventory on Hand

54.95

53.72

55.29

60.48

63.48

59.03

63.50

67.61

66.28

64.67

66.90

Here, it clearly tells us that the rate of inventory management is increasing day by day which is not good for business. It mans that the liquid cash of business is getting low and the management cost of business is increasing day by day for keeping liquid inventory in stock for long time. So, DOH simply tells us that the inventory ratio should be low.