The inventory conversion period is defined as the total time period required converting the entire inventory into sales. In other words it can be defined as a relationship between the total number of days in financial period and the inventory turnover ratio. This is calculated as the total time that exists between the purchase of merchandise as inventory and then selling the entire inventory of that purchased merchandise. The formula of inventory conversion period can be shown as under:-
Inventory Conversion Period = Total Inventory/ (Cost of Sales /365)
In most of the cases inventory conversion period is calculated for all the products stored in the warehouse of a company however it is better to calculate the inventory conversion period of individual product to get accurate results related to sales and purchase of that product.
While interpreting inventory conversion period it must be kept in mind that less period is better for the organization or business as it indicates the total inventory is converted into sales in a less time and there is no need to worry about the over-stocking and obsolesced of the products. Inventory conversion period is directly related to the cash conversion cycle. This means that if an inventory takes a long time to end up into sales it will affect the cash conversion cycle as a result the business has to liquidate the inventory in order to complete cash conversion cycle. Appropriate decisions regarding inventory level can be taken by the business by taking care of these metrics including inventory conversion period, average collection period and cash conversion cycle.
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