Inventory days, also known as inventory outstanding, 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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Days inventory outstanding formula:
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 see an example of the days in inventory formula. 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.
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.
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.
There are many benefits to monitoring your days inventory outstanding:
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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