Inventory days and Probability: Difference between pages

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''Financial ratio analysis - management efficiency ratios.''
The study of chance providing an objective measure of uncertainty.


Inventory days is a working capital management ratio calculated by dividing inventory outstanding at the end of a time period by the average daily cost of goods sold for the period.


   
Probabilities range between 1 (=100%) and 0 (=0%).  
For example: a company holds on average £30,000 of stock over a year. It sells £300,000 of goods per annum.


The inventory days are:
A probability of 100% means that an event is considered certain to occur.


(30,000 / 300,000) x 365
A probability of 0% means that an event is considered certain not to occur. 


= 36.5 days


For example, flipping an unbiased coin, the probability of getting a head is often modelled as 50%.


A lower number of days is usually considered desirable, because it is a quick measure of the amount of stock held, although the business must also gauge the amount of stock required to meet customers’ delivery expectations.


This simple model of a coin flip assumes that the only two possibilities are a head or a tail.  Applying such simple models to financial situations, and treating financial outcomes as simple coin flips, may lead to errors resulting from:


Also known as Days inventory outstanding (DIO).
#The coin landing on its edge 'more often than it's supposed to'.
#The underlying assumption of an unbiased coin not being a valid one. This kind of assumption is usually much too simple.




== See also ==
== See also ==
* [[Cost of goods sold]]
* [[Black swan]]
* [[Creditors]]
* [[Conditional probability]]
* [[DPO]]
* [[Confidence interval]]
* [[DSO]]
* [[Frequency distribution]]
* [[Inventory]]
* [[Mutually exclusive]]
* [[Inventory turnover]]
* [[Poisson distribution]]
* [[Management efficiency ratio]]
* [[Operating cycle]]
* [[Payables management]]
* [[Working capital]]
 
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]

Revision as of 15:19, 8 June 2016

The study of chance providing an objective measure of uncertainty.


Probabilities range between 1 (=100%) and 0 (=0%).

A probability of 100% means that an event is considered certain to occur.

A probability of 0% means that an event is considered certain not to occur.


For example, flipping an unbiased coin, the probability of getting a head is often modelled as 50%.


This simple model of a coin flip assumes that the only two possibilities are a head or a tail. Applying such simple models to financial situations, and treating financial outcomes as simple coin flips, may lead to errors resulting from:

  1. The coin landing on its edge 'more often than it's supposed to'.
  2. The underlying assumption of an unbiased coin not being a valid one. This kind of assumption is usually much too simple.


See also

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