AVERAGE AGE OF INVENTORY

The average number of days it takes for a firm to sell a product it is currently holding as inventory to consumers. The formula to calculate the average age of inventory is C/G x 365, where C is the average cost of inventory at its present level and G is the cost of goods sold, multiplied by the number of days in a year.

For example, if the inventory is valued at $100,000 and the cost of goods sold is $600,000, the average age of inventory is 60.8 days. That means that on average it takes a firm approximately two months to sell a piece of inventory.

Can also be referred to as “days to sell inventory.”

A high average age of inventory can indicate that a firm is not properly managing its inventory or that it has a substantial amount of goods that are proving difficult to sell. Average age of inventory can help purchasing agents make buying decisions and help managers make pricing decisions (e.g. discounting existing inventory to move product and increase cash flow).

The higher a firm’s average age of inventory, the greater its exposure to obsolescence risk, the risk that the accumulated products will lose value in a soft market. Average age of inventory is critical in industries with rapid sales and product cycles (such as technology). If a firm is unable to move inventory, it will take an inventory write-off charge, meaning that the products were not equivalent to their stated value on a firm’s balance sheet.