Inventory is a top tier expense for most businesses, one that many companies struggle to manage effectively. To be successful, you’ll need to be diligent and organized.
Carrying too little inventory can cost you money in the form of lost sales. Carrying too much inventory can cause you to incur carrying costs and tie up finances.
As such, managing inventory is all about striking a balance between having enough product to meet demand, but not so much that it sits in your warehouse.
One of the most useful tools to help you understand if you’re landing in the sweet spot is the weeks on hand formula.
This measurement, which is also referred to as the inventory weeks on hand formula, will allow you to better understand your stocking levels by showing you how long items are carried in inventory.
As such, weeks on hand refers to the time it takes a company to sell the stock it’s currently holding. If your business is one with super high volume, this might be referred to as days on hand instead.
Ready to learn more, including how to calculate the weeks on hand time for your own inventory? Let’s get started.
Why is weeks on hand important?
One of the most common questions business owners ask when the topic of weeks on hand metrics are brought up is, “Why is this important?”
The key reason why tracking weeks on hand is crucial to your inventory management efforts is because for many companies, their inventory represents a huge part of their financials.
For small businesses in particular, knowing your weeks on hand number can be valuable. With large chunks of your capital tied up in your inventory, this metric can provide a snapshot of your business’s overall health.
If your calculations reveal you’re sitting on items for weeks (or months), then you’re clearly not managing your inventory as efficiently as possible and potential outside investors or stakeholders may be put off by this information. A company that turns over inventory rapidly is perceived as healthier in most instances.
However, like so many things in business, the reason weeks on hand matters to most businesses is because it shows them where they may be spending money unnecessarily, or losing money thanks to poor inventory management.
That alone should be more than enough reason for you to want to make sure you have your weeks on hand numbers right, in the perfect spot where customers are happy, and product is moving.
What is inventory turnover?
At its core, weeks on hand gives us an insight into our inventory turnover rate. What is inventory turnover, though?
Inventory turnover (which is also commonly referred to as stock turns, inventory turns, and stock turnovers) is a calculation that provides us with a ratio of how often you’ve sold and replenished inventory during a specified period. This period can be any amount of time you choose, such as a month, or a quarter, or a year.
Understanding your inventory turnover rate will help you make decisions about things like stock levels, pricing, and manufacturing.
The inventory turnover metric is a key component you’ll need to know when you’re figuring out your weeks on hand data.
Here’s how you use the inventory turnover formula:
Inventory Turnover = Sales / Average Inventory
To get the average inventory, you’ll use this formula:
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
An alternative method of calculating inventory turnover replaces sales with cost of goods sold instead.
The reason for this is because using cost of goods sold instead of sales provides a more accurate picture of inventory turnover.
As sales include markups beyond cost, they can lead to an inflated inventory turnover rate, whereas using costs of goods sold removes those markups.
Either method is viable, just understand that there can be some significant differences depending on which calculation you use.
Using the weeks on hand formula
Once you’ve acquired the inventory turnover rate for your business, it’s time to calculate your weeks on hand inventory data.
Here’s the formula most commonly used:
Weeks on Hand = Accounting Weeks in Period / Inventory Turnover Rate
Here’s a simple example of it in action:
For easy math, let’s say our cost of goods sold is $10,000,000 and your average inventory is $1,000,000.
Turnover rate = 10,000,000/1,000,000
Our turnover rate is 10.
Now we’ll assume we’re using 52 weeks for the number of accounting weeks in the period (this doesn’t have to be 52 weeks, you will decide what your accounting period is).
Weeks on Hand = 52/10
When we do the math, we learn our weeks on hand number is 5.2.
You can also break this down to days on hand by simply replacing accounting weeks with accounting days instead.
The math is not difficult here, but if you want to make life even easier you can utilize an Excel weeks on hand formula to do this automatically once you plug in the numbers, or even better, track it with inventory management software.
No matter how you choose to calculate your weeks on hand number, we hope you realize the importance of this metric.
While weeks on hand data is often important to outside investors and stakeholders looking to get a snapshot view of how your business is operating, the metric can give you insight into how things are going too.
Understanding weeks on hand numbers will allow you to see if you’re keeping your inventory levels balanced between customer needs and turning a profit. Most companies tie up a lot of their capital in inventory costs, but having a better understanding of how fast you move inventory out of the warehouse and on to a happy customer can improve your bottom line significantly.
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