Final answer:
The "number of days' supply in inventory ratio" measures the average number of days a company holds inventory before selling it, calculated as (Average Inventory / Cost of Goods Sold) × 365, revealing inventory management efficiency.
Step-by-step explanation:
The "number of days' supply in inventory ratio" is a measure used in business to determine the average number of days that a company keeps its inventory before selling it. This metric gives insights into a company's inventory management efficiency and cash flow implications. To calculate this ratio, the formula used is:
Number of Days' Supply in Inventory = (Average Inventory / Cost of Goods Sold) × 365
In this formula, Average Inventory is usually calculated by taking the sum of the inventory at the start and end of a period divided by two. The Cost of Goods Sold (COGS) is the total cost of manufacturing the goods that were sold during that period. Multiplying the result by 365 days standardizes the ratio for a yearly basis.
By using this formula, businesses can strategically plan their inventory levels and reduce holding costs, improving overall efficiency and growth rates.