Days Inventory Outstanding (DIO)

Days inventory outstanding measures how long a business retains its physical inventory.

Calculating days inventory outstanding (DIO) regularly enables businesses to evaluate the effectiveness of their inventory management. It’s also a crucial metric for attracting investors and evaluating other measures of business efficiency such as the cash conversion cycle (CCC).

What does days inventory outstanding mean?

Days inventory outstanding is a measure of how long it takes a business, on average, to sell stored inventory. In other words, DIO calculates the average age of a business’s inventory. DIO is sometimes referred to as days sales of inventory (DSI) or days in inventory (DII).

The average days inventory outstanding value varies between industries depending on the types of goods stocked. For example, food retailers would have a much lower DIO than automotive retailers. As a best practice, businesses should compare DIO values with similar businesses in their sector. However, the goal is generally to minimize this metric, shortening the time inventory is stored before being sold. Quicker inventory turnover often results in higher profits.

Days inventory outstanding formula

Businesses can calculate days inventory outstanding with the following DIO formula:

(Average inventory/COGS) x Days = DIO

“Average inventory” indicates the average dollar value of a business’s inventory over a given period. The cost of goods sold (COGS) covers any costs required for the development of the goods, including materials, utilities and labor. “Days” is the number of days in the reporting period. Businesses typically calculate DIO on a quarterly (90-day) or annual (365-day) basis.

Why is this important?

Effective inventory management is crucial for profitability and growth, especially for businesses that sell physical products. Days inventory outstanding is one of the best ways for a business to evaluate its inventory management and turnover efficiency. A low DIO, relative to competitors, usually indicates that a business:

• Can turn over its inventory quickly.
• Maintains efficient inventory management practices.
• Offers relevant products that are in sufficient demand.
• Can improve purchasing power during inflationary periods by reinvesting cash from sales into new inventory before prices get higher.
• Is more likely to attract investors that consider DIO to assess business productivity and product-market fit.

DIO is also necessary for calculating the cash conversion cycle (CCC), which measures how many days it takes a business to convert inventory investments into cash:

DIO + DSO – DPO = CCC

The cash conversion cycle factors in DIO as well as days sales outstanding (DSO) and days payable outstanding (DPO). DSO indicates the number of days it takes customers to pay invoices, while DPO indicates how long it takes a business to pay its bills. In addition to DIO, the CCC is a broader measure of operational efficiency and can illuminate strategies for improved cash flow, such as accelerating invoice payments.

However, there are some situations where a high DIO doesn’t necessarily indicate poor efficiency. Seasonal businesses often invest in the bulk of their inventory before an upcoming busy season — an important context to consider when evaluating DIO. Additionally, if short supply is anticipated, businesses may proactively stock up on inventory to gain higher profits when demand rises.

The benefits of measuring days inventory outstanding

• Improve inventory management. Lowering DIO ensures that the business isn’t holding on to its inventory for too long.
• Gain more visibility. Tracking DIO helps reveal signs of declining business productivity and supports other financial metrics such as the cash conversion cycle.
• Increase cash flow. Minimizing DIO means that the business is getting products out the door faster, boosting profits and increasing cash flow.