Days Inventory Outstanding - The Strategic CFO®

Table of contents

1. Days Inventory Outstanding
2. Days Inventory Outstanding Explanation
3. Days Inventory Outstanding Formula
4. Days Inventory Outstanding Calculation
5. Days Inventory Outstanding Example
6. Resources

See Also: 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

Calculate the days inventory outstanding formula using the following equation: DIO = (average inventory / cost of goods sold) * 365 days

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Days Inventory Outstanding Calculation

Days inventory outstanding calculations cross a myriad of needs and purposes. For 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

For 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. [box]Strategic CFO Lab Member Extra Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company. Click here to access your Execution Plan. Not a Lab Member? Click here to learn more about SCFO Labs[/box]

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.