Weeks on hand formula: what is it and what is it for?
Weeks on hand refers to the average amount of time it takes a business to sell the inventory it has on hold. For businesses where there is high, recurring demand, this metric can also be measured in days.
Why is weeks on hand an important metric?
Weeks on hand is an important metric for small businesses because it provides a snapshot into the health of the business. Because weeks on hand shows the time it takes to distribute an aggregate value of a company’s inventory – it is an easy way for potential investors and stakeholders to measure a company’s performance.
Inventory takes up a significant amount of a company’s working capital and it incurs a carrying cost. Therefore, fewer weeks or days on hand is an indication that the stock is being moved at an optimized rate.
Inventory turnover, the first step to calculate weeks on hand
Inventory turnover is a ratio that measures the number of times inventory is sold or consumed in a given time period. It is an essential component of the weeks on hand formula.
Also known as inventory turns, stock turn, and stock turnover, the inventory turnover formula is calculated by dividing the cost of goods sold (COGS) by average inventory.
The formula to determine turnover rate is as follows: Inventory turnover rate = Cost of Goods Sold / Average inventory for the accounting period
How to calculate weeks on hand inventory
Once you have determined your inventory turnover rate, all you yo have to do is use this simple formula.
Weeks on hand formula
Take your accounting period in weeks (52 weeks).
Divide the accounting period by your inventory turnover rate.
Assuming you have COGS of $5 million and your average inventory is $500,000;
Alternatively, for businesses with high, recurring demand, calculate your days of inventory on hand, simply by taking your accounting period in days (356 days) and dividing it by your inventory turnover rate:
Days on hand = 365 / 10 Days on hand = 36.5 days
So there you have it, the weeks (and days) on hand metric for your inventory. Once you have this measurement, the next step is to find ways to have fewer weeks on hand and increase efficiency.
Having high demand may seem like the most obvious way to reduce your weeks on hand but without proper inventory management, it could actually have the opposite effect. High demand, without the proper warehousing and shipping workflows in place, could lead to delays in replenishment and in deliveries all of which keep stocks on your shelves for longer.
Investing in tools like TradeGecko that automate large parts of your inventory and order management workflows could help free up your working capital and decrease the number of weeks you have inventory on hand.
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