Average Age Of Inventory
Candlefocus EditorTo calculate average age of inventory, one must first add the inventory value at the beginning and end of an accounting period and divide that sum by two. Then, divide the cost of goods sold (COGS) during the period by the resulting figure multiplied by 365 to arrive at the average age of inventory in days.
A company with a low average age of inventory (or a high turnover rate) generally indicates the company is doing well. This is because the company is able to sell its inventory quickly and profit from its sales before it depreciates in value or becomes obsolete. A company with a high average age of inventory may signify the company is having trouble moving its inventory or, alternatively, that it is tracking its inventory inaccurately.
An increasing average age of inventory can indicate something wrong in the company, such as inadequate customer service, difficulty predicting customer demand, limited or overpriced inventory or lack of customer engagement. If a company notices a rising average age of inventory, it should take a closer look at its customer relations, inventory management and marketing activities.
The average age of inventory is just one of the metrics a business should use to assess its inventory turnover rate; other metrics like gross profit margin should also be taken into consideration. A company should analyze its inventory metrics in order to increase profitability and customer satisfaction. Doing so can help a company to maintain customer loyalty and differentiate itself in the marketplace.