Days Inventory Outstanding: Formula, Uses, and Relevance

Quick inventory turnover means less cash is tied up, freeing resources for strategic initiatives such as growth investments, debt reduction, or shareholder returns. Conversely, a high DSI can limit financial flexibility by tying up capital, potentially stifling growth. Doing a macro measure once per quarter helps to reveal overall corporate finance health.

Content Marketing Manager at Drip Capital

To understand how you’re doing, check DIO calculations against industry benchmarks. A low inventory turnover rate suggests either weak sales or excess inventory. This indicates it took the company 36.5 days to convert its inventory investment into cash for the period analyzed. Many experts concur that a decent days’ supply indicator (DSI) should be between thirty and sixty days in order to effectively manage inventories and balance idle stock with being understocked. Naturally, this depends on the industry, the size of the firm, and other elements. The kind of product, company strategy, and time needed for replenishment are a few variables that impact how long it takes to sell inventory.

Overview of all products

To calculate inventory turnover days on a monthly basis, use the number of days in that month instead of 365. A lower DSI number indicates that a company is efficiently managing its inventory levels. A higher number could mean excess inventory or poor inventory management.

Therefore, comparing DIO between companies in the same industry offers a much better, more accurate and fair, basis for comparison. A low DSI suggests that a firm is able to efficiently convert its inventories into sales. This is considered to be beneficial to a company’s margins and bottom line, and so a lower DSI is preferred to a higher one. A very low DSI, however, can indicate that a company does not have enough inventory stock to meet demand, which could be viewed as suboptimal. Doing monthly calculations allows you to spot inventory trends over time rather than just an annual average. The ending inventory then becomes the beginning inventory for the next accounting period.

Where DOI measures how quickly inventory is converted into liquid assets, inventory turnover rate simply measures the number of times stock on hand is sold and replenished in the period analyzed. DSI and inventory turnover ratio can help investors to know whether a company can effectively manage its inventory when compared to competitors. A stock that brings in a higher gross margin than predicted can give investors an edge over competitors due to the potential surprise factor. DSI is the first part of the three-part cash conversion cycle (CCC), which represents the overall process of turning raw materials into realizable cash from sales. The other two stages are days sales outstanding (DSO) and days payable outstanding (DPO).

• Doing monthly calculations allows you to spot inventory trends over time rather than just an annual average.
• Days Sales of Inventory (DSI), also known as Days Inventory Outstanding (DIO), is a financial metric used to evaluate how efficiently a company manages its inventory.
• You can use the DIO formula to measure the performance of your inventory management.

What is days inventory outstanding and how can your business use it?

Investing in inventory management software with demand planning features will help you set more accurate stock levels and reduce your holding costs. The best way to reduce inventory days is to take control of your inventory management. You can take action to streamline your supply chain, adjust your pricing, sales and marketing to sell more items faster, and improve demand forecasting to tweak your range. Adding automation to your inventory process can also minimise errors and time spent on administrative tasks. Days Sales in Inventory (DSI) is a powerful tool for enhancing inventory management and guiding strategic decisions. To maximise its value, businesses should ensure accurate data collection and calculation through consistent tracking of inventory levels and cost of goods sold.

Forecasting software can give businesses a quicker answer, reducing human error and maximizing accuracy. By calculating DIO, you can see whether the business turns inventory into sales quickly or not. A low days inventory outstanding ratio means that the company is efficient and quickly liquidates stock.

Days Sales in Inventory vs. Inventory Turnover Ratio

You may find that some products cost you a relative fortune to produce and store but don’t earn much in sales. Tracking the Days Inventory Outstanding metric is a useful activity for understanding the liquidity of your business in each accounting period. The results can help you identify inventory bottlenecks and make informed decisions to increase workplace efficiency. Inventory management software like Unleashed can automatically calculate DIO for a business and create reports for comparing average DIO between different products, accounting periods, and more.

One reason your company might struggle with low inventory is vendor delivery times. 72% of small and medium-sized businesses struggle with inconsistent delivery times, especially if they’re sourcing their inventory from vendors overseas. Inventory forecasting can help reduce this problem by giving businesses a better understanding of when they should re-order their products to stay ahead of product demand. Days inventory outstanding is a ratio to evaluate a company’s inventory management efficiency. It is also referred to as days sales of inventory (DSI) and days in inventory (DII).It gives an indicator of the cost of holding goods and the duration for which inventory is held on average. To calculate inventory days for your business, divide your cost of goods sold (COGS) by 365 days.

Regularly monitoring inventory days and turnover can help companies spot trends, reduce excess stock, cut costs, and better adapt to changes in consumer demand. Comparing to industry benchmarks also supports operational improvement efforts. Overall, inventory days serve as a vital analytics tool for healthy inventory management and maximizing profits.

• The moving average is simply an average of units sold over a set period.
• The finished product is roasted, bagged, sealed, and labeled coffee beans.
• While DSI focuses on the duration inventory is held, the turnover ratio highlights sales frequency.
• Establish your own benchmarks and measure performance against industry standards.
• Theoretically, you can use your past data to help you understand how many trees you should order and when.
• What we’re trying to calculate when we calculate inventory days is how long, on average, it takes BlueCart Coffee Company to turn green coffee beans into sales.

Comparing the metric year-over-year can indicate improving or worsening inventory management. Monitoring changes in inventory days over consecutive periods reveals trends in inventory management efficiency. As part of ratio analysis, inventory days may be assessed alongside related turnover ratios like inventory turnover to evaluate operational and sales performance. The inventory days formula is an important financial metric that measures how long it takes a company to turn over its inventory. Specifically, it calculates the average number of days that a company holds its inventory before selling it.

The ideal approach is to improve margins through better pricing and cost control while optimizing inventory turnover to maximize working capital efficiency. Gross days inventory held margin measures profitability after accounting for direct costs. Higher margins mean greater buffer to cover inventory carrying costs. Companies should analyze trends in both metrics and identify opportunities to improve working capital efficiency. If you take a quick look at your numbers, it’s clear that 110 toothpaste tubes are enough to maintain your inventory levels. However, you’ve changed your marketing approach and gained loyal customers.

If you’ve been in business for a while, you likely can predict when your products will be popular among your customers based on their purchase history. Although AI inventory forecasting can help you make better, more informed decisions for inventory management, there is still a significant drawback. Only 23% of small and medium-sized businesses use AI in their forecasting efforts.

For example, a company might build up safety stock to anticipate supply chain disruptions or price increases. In summary, keeping inventory days at an optimal level prevents excess carrying costs while ensuring adequate product availability – both crucial for financial health. As such, the inventory days formula offers actionable insights for businesses to effectively manage inventory. If your DIO is trending upwards, you should analyse your sales process and demand forecasting strategy.

Automation through software and technologies like barcode scanning or RFID ensures accuracy and reduces errors, supporting better DSI management. Strengthening supplier relationships reduces lead times, allowing for lower inventory levels. Vendor-Managed Inventory (VMI) systems place stock management responsibility on suppliers, further decreasing DSI. Improved logistics, such as optimised transportation routes and warehouse efficiency, can also enhance inventory turnover. A financial ratio called days sales of inventory (DSI) shows how long it typically takes a business to sell the products in its inventory. Days Sales of Inventory (DSI) analysis involves assessing how efficiently a company manages its inventory by measuring the average number of days it takes to sell its inventory stock.

The days in period refers to the number of days covered by the data used in the formula, usually a full fiscal year or a financial quarter. Knowing the accurate period length is essential for calculating the time products sit in inventory. Unusual fluctuations in inventory days warrant further investigation into factors driving longer or shorter inventory holding periods. This may spur operational changes to align inventory levels with sales activity. If you want to minimize costs within your inventory management system and have the perfect number of products in stock, you’ll want to use economic order quantity forecasting, or EOQ. According to Zalzal, there are three basic inventory forecasting models, and you can calculate them by hand without getting a headache.