What Is Inventory Conversion?

By Andrew Stotz | August 10, 2020

Definition of Inventory Conversion Period

The inventory conversion period is the timeframe that encompasses the process of obtaining the raw materials, manufacturing, to selling the product.
It helps the firms estimate the timespan between the day raw materials are bought to the day the product is sold.
The ideal inventory conversion ratio differs between industries.

To calculate the inventory conversion period, divide the average inventory by cost of goods sold per day.

Inventory conversion period = inventory/cost of goods sold per day

If the average inventory of Walter pharmacy is $800 and the annual cost of goods sold is $146,000. What is the inventory conversion period of Walter’s pharmacy?
As the cost of goods sold is given in years, it has to be converted into days. So $146,000/ 365 days = $400 per day.
Now the information can be plugged in the formula:
- $800/ $400 = 2 days
In conclusion, Walter pharmacy can purchase raw material, manufacture, and sell the products, all within two days.

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