Why do inventory days on hand matter?
There are a few reasons why inventory DOH is such an important metric.
First, it lets you track how quickly or slowly your product sells. This information can help you make decisions about production levels.
If you see that a product has a high DOH, it may mean that you need to adjust your production levels downwards. On the other hand, if a product has a low DOH, it may be time to ramp up production.
Second, inventory DOH can help you predict future customer demand. If you see that a product’s DOH is increasing, it may be an indication that customer demand is about to spike. This information can help you have fewer stockouts by ensuring that you have enough product on hand to meet customer needs.
Finally, inventory DOH is a key component of capital management. Working capital is a business’s money available to fund day-to-day operations and short-term expenses.
Money that is tied up in inventory that has not yet been sold is a major piece of that capital calculation.
By optimizing a company’s inventory carry costs, businesses can free up working capital that can be used to invest in other areas of the business, fund short-term expenses, or increase their liquidity ratio. This can be a critical tool for small businesses with limited funding access.