Stock needs to be available for sale when your customer is ready to buy. But because it sucks up cash to have it waiting to be sold, it is good stock management to keep stock on the shelf for the shortest possible time.
Think of stock as fifty dollar bills piled up in your stock room. This is a good incentive to manage stock at every stage. Vital to this objective is knowing the sales cycle of your products, that is, how long it takes from when goods arrive until they are sold. The time goods are sitting in stock is called stock days. One way to calculate stock days using your financial reports is as follows:
Stock on hand ÷ Cost of goods x Time period = Stock days
Stock on hand means the dollar value of stock in store at a given date. Cost of goods means the direct cost of getting the goods ready for sale including purchasing, freight and store costs but not fixed overheads like administration, wages or advertising. Time period is the reporting period upon which you are basing the other two numbers.
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