It is a calculation method that calculates how long it takes for the goods in stock and, if possible/necessary, to be converted into sales. General usage is in the form of time spent in a stock account. The goal here is to reduce the cost of holding stock by providing low times.
Formula;
(Average Stock / Cost of Sales) x Relevant Period Duration
Average Stock = (Beginning Stock + End-of-Period Stock) / 2
Or just End-of-Period Stock (from perspective)
The period duration is usually calculated as 365days/year or 90days/quarter year.
Unless a comparison is made, the result alone will not mean anything because there is no standard for it. The result may vary on the basis of time/sector/country/period. For this reason, it would be more accurate to make a relative and strategy-oriented evaluation rather than making an immediate comparison.
The contributions of this calculation are;
Measures sales performance,
Measures the liquidity of stocks,
Measures how many days sales can be made with stocks,
Provides control of production and/or stock keeping policy,
Provides control of the Minimum Stock policy,
It contributes to the investigation of root causes of financing problems.
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