How to calculate days inventory outstanding (DIO)

    Days inventory outstanding (DIO), also known as days sales of inventory (DSI), refers to the number of days it takes for inventory to turn into sales. The average inventory days outstanding varies from industry to industry, but generally a lower DIO is preferred as it indicates optimal inventory management.

    Calculating your inventory turnover period is valuable information, as it allows you to assess how well you’re managing your inventory, how cost effectively you’re running your business, and helps to identify areas for improvement.

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    How to calculate days inventory outstanding (DIO)

    You can calculate days inventory outstanding by following this formula:

    dio calculation

    Determining whether your DIO is high or low depends on the average for your industry, your business model, the types of products you sell, etc.

    Let’s say Jenny owns a grocery store, where she has $2,000 in inventory on average, and $20,000 in COGS. Here, DIO would be:

    (2,000 / 20,000) x 365 = 36.5 days

    Jenny knows that the average DIO for comparable businesses in her area is 30 days. As such, she decides to offer bulk discounts on certain items to entice customers to buy more with each transaction, bringing down her DIO and helping to boost her cash flow.

    Is DIO the only inventory turnover technique?

    Another technique that’s sometimes used  for calculating inventory turnover is sales divided by inventory. This ratio tells you how many times your inventory sitting in stock has been moved or "turned over" during the average year.

    days inventory outstanding

    However, because inventory sitting in a warehouse is valued at its production cost, not its sale price, this method won’t necessarily yield an accurate result. Nonetheless, some businesses that struggle to calculate Cost of Goods Sold opt to use this formula instead.

    Why calculate DIO?

    There are many benefits to monitoring your days inventory outstanding:

    • Optimize inventory management – Make decisions about inventory purchases based on how well you’re tracking to your DIO benchmark.
    • Improve cash flow – Identifying ways to cut down your DIO helps free up cash that can be invested in other areas of the business.
    • Indicates a need for new  marketing and pricing decisions – If your DIO is higher than preferred, you might decide to introduce discounts, product bundles or other incentives to encourage customers to purchase more frequently.
    • Reduce the risk of spoilage – It’s especially important to keep your DIO low if you hold perishable goods or seasonal items, as the longer they stay on the shelves, the higher the chances of inventory spoilage or dead stock.
    • Plan for the future – Understanding how your DIO fluctuates over the course of the year due to seasonal sales periods peaks and troughs can help you create an accurate inventory forecast for the future of your business.

    calculating days inventory outstanding

    The future of DIO

    As more and more businesses utilize inventory management software to track inventory sales and turnover rates, calculating inventory turnover rates just becomes part of your day-to-day business.

    With TradeGecko’s new demand forecasting capability, you can manage and monitor inventory values and pending orders from the one dashboard, as well as easily generate sales reports to see how efficiently you’re managing your entire order fulfillment cycle. With tools like these, businesses today are well equipped to keep their inventory levels optimal at all times.

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