Inventory Turnover Ratio
Inventory to Working Capital Ratio
How to Manage Inventory
Days Sales Outstanding (DSO)
Days Payables Outstanding (DPO)
How to Develop Daily Cash Report
13 Week Cash Flow Report
Supply Chain and Logistics
Days Inventory Outstanding
Days inventory outstanding (DIO), defined also as days sales of inventory, indicates how many days on average a company turns its inventory into sales. Value of DIO varies from industry and company. In general, a lower DIO is better. A useful tool in managing and improving inventory turns is a Flash Report!
Days Inventory Outstanding Explanation
Days inventory outstanding ratio, explained as an indicator of inventory turns, is an important financial ratio for any company with inventory. It shows how quickly management can turn inventories into cash. In general, a decrease in DIO is an improvement to working capital, and an increase is deterioration.
Days Inventory Outstanding Formula
The days inventory outstanding formula can be calculated using the equation below:
DIO = (average inventory / cost of goods sold) * 365 days
Days Inventory Outstanding Calculation
Days inventory outstanding calculations cross a myriad of needs and purposes.
Example: a business has $2,500 in inventory on average, $25,000 in cost of goods sold.
DIO = (2,500 / 25,000) * 365 = 37 days
Days Inventory Outstanding Example
James is the owner of a grocery store. His store, a private seller of groceries to a large suburb, has grown to be a household name in his local area. James now wants to find his DIO for his store, as well as, select product lines.
James begins by talking to his accountant. The accountant, skilled in his profession, performs this days inventory outstanding analysis:
James’ store has $2,500 in inventory on average, $25,000 in cost of goods sold.
Days Inventory outstanding = (2,500 / 25,000) * 365 = 37 days
James’ store is keeping pace with the national market of grocery stores. In his state, however, James’ store could use a little improvement. James considers options such as clearance item discounts or running coupons on items which he wants to sell faster. These promotions, including lower prices, could produce the inventory turnover which James is looking for.
James now looks to his bookkeeper for up-to-date information on his days inventory outstanding for certain product lines. James allows time to find these measurements and is confident that with the right team, perspective, and motivations he can grow his store further.
Reducing days inventory outstanding is just one of the many ways to improve the cash flow of a company. If you’re looking for 24 ways to improve cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.
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