Why Days Sales in Inventory Matters
Companies can unlock value by reducing days sales in inventory. A lower days sales in inventory has a number of benefits:
• Shorter cash conversion cycle
• Lower inventory holding costs
• Ability to operate with narrow margins
Benefit #1
Reducing a company’s days sales in inventory shortens its cash conversion cycle. The cash conversion cycle, also known as the cash-to-cash cycle, is the sum of days sales in inventory (DSI) and days sales outstanding (DSO) minus days payable outstanding (DPO).
Cash Conversion Cycle = DSI + DSO – DPO
If a company can reduce days sales in inventory it can reduce the length of its cash conversion cycle, which means the company will need less capital to finance inventory.
Benefit #2
Reducing a company’s days sales in inventory also reduces inventory holding costs. It’s not free to hold inventory, as companies incur the cost of:
• Storing the inventory
• Insuring the inventory against loss from fire, storm, or shipwreck
• Safeguarding the inventory with security measures
• Paying property taxes on the inventory
Some inventory faces the risk of obsolescence, while other inventory is at risk of spoilage. Inventory may also be lost, broken, or stolen. These events can lead to inventory writedowns that reduce the company’s profit.
There is also the opportunity cost of holding inventory, as the capital tied up in inventory could have been put to use in other projects or invested in securities to earn a return.
Benefit #3
Reducing DSI also allows a company to achieve profitability with a low gross margin.
0:00 Introduction
0:08 3 benefits of reducing DSI
0:18 Cash Conversion Cycle
2:53 Lower Inventory Holding Costs
4:17 Ability to operate with narrow margins
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
http://eepurl.com/dIaa5z
—
SUPPORT EDSPIRA ON PATREON
* / prof_mclaughlin
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
https://edspira.thinkific.com
—
LISTEN TO THE SCHEME PODCAST
Apple Podcasts: https://podcasts.apple.com/us/podcast...
Spotify: https://open.spotify.com/show/4WaNTqV...
Website: https://www.edspira.com/podcast-2/
—
GET TAX TIPS ON TIKTOK
/ prof_mclaughlin
—
ACCESS INDEX OF VIDEOS
https://www.edspira.com/index
—
CONNECT WITH EDSPIRA
Facebook: / edspira
Instagram: / edspiradotcom
LinkedIn: / edspira
—
CONNECT WITH MICHAEL
Twitter: / prof_mclaughlin
LinkedIn: / prof-michael-mclaughlin
—
ABOUT EDSPIRA AND ITS CREATOR
https://www.edspira.com/about/
https://michaelmclaughlin.com
