5.4.2 Inventory days
The inventory days ratio is used to make an assessment of the effectiveness of inventory management in a business. It can be calculated by using the following formula:
Since the value of inventory is taken at cost, cost of sales is used when calculating inventory days. This ratio gives an indication of the number of days it may take to sell the normal or average level of inventory held by a business. It is important to note that although average inventory levels should be used to calculate this ratio, this information is hard to obtain in financial statements. The average of opening and closing inventories can be used to calculate average inventory. For convenience in this course, average inventory is replaced by closing inventory. Furthermore, this ratio is calculated based on the figure of cost of sales for the previous year and the cost of sales for future periods might be significantly different.
Below is the calculation of inventory days for Remote Sensors Plc. The number of days has been rounded to whole numbers.
| 2025 | 2024 | 2023 | |
|---|---|---|---|
| £ | £ | £ | |
| Closing inventory | 2,056 | 2,501 | 1,860 |
| Cost of sales | 10,590 | 10,660 | 9,876 |
| Inventory days | 71 | 86 | 69 |
You can see that inventory days for Remote Sensors Plc increased from 69 days in 2023 to 86 days in 2024. An increase in inventory days may indicate that either inventory is sitting within the business for long periods of time or may signal problems in the ability of management to sell the company’s products. Inventory days reduced again in 2025. Very short inventory days may indicate a high volume of sales, and management might face difficulties in meeting high demand for products and services due to inadequate levels of inventory. The nature of the business is crucial to interpreting inventory days. For example, fashion retailers such as Next or grocery supermarkets such as Tesco may have a very short inventory days ratio when compared to the manufacturers of high-end expensive products which may take a long time to manufacture.
Activity 15 provides you with an opportunity to practise calculating and interpreting inventory days of a real company and developing your skills for numeracy and analysis.
Activity 15 Calculating inventory days
Read the data on closing inventory and cost of sales for Marks & Spencer Group Plc from 2018 to 2022 (obtained from Fame) and answer the questions below.
- a.Use the data to calculate inventory days for the years 2018 to 2022.
| 2022 | 2021 | 2020 | 2019 | 2018 | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| Closing inventory | 706.1 | 624.6 | 564.1 | 700.4 | 781.0 |
| Cost of sales | 7,130.3 | 6,244.1 | 6,589.5 | 6,547.2 | 6,650.9 |
| Inventory days |
Comment
| 2022 | 2021 | 2020 | 2019 | 2018 | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| Closing inventory | 706.1 | 624.6 | 564.1 | 700.4 | 781.0 |
| Cost of sales | 7,130.3 | 6,244.1 | 6,589.5 | 6,547.2 | 6,650.9 |
| Inventory days | 36 | 37 | 31 | 39 | 43 |
- b.How do you interpret the changes in inventory days during these years?
Feedback
Inventory days reduced from 43 days in 2018 to 39 days in 2019. This was a positive sign as the company was keeping its stock for a lower number of days. Later on, there was a further significant decline in inventory days in 2020 to 31 days, which implied that the stock retention time reduced by almost 8 days before that inventory was sold. Inventory days increased to 37 days in 2021, and remained at 36 days in 2022. For a retailer such as M&S, 36 inventory days may appear to be on the higher side. However, it must be noted that the company has to maintain some inventory levels owing to the seasonal nature of its business. It is also important to note that changes in weather, the Covid-19 pandemic and the effects of inflation have also influenced consumers’ buying behaviour and companies in the retail sector have had to retain inventories to deal with periods of uncertainty. Comparisons with other close competitors can, however, provide useful insights.