A complete guide to days inventory outstanding DIO

While monitoring DIO is a great first step, you must work to improve it over time with supply chain optimization, technology, and regular audits. Invoice factoring is a flexible, debt-free option that can improve liquidity by selling your invoices to a provider like altLINE in exchange for fast cash. Instead of turning down business opportunities, consider temporary financing to bridge the gap.

• In this example, the bicycle manufacturer has, on average, about 22 days of inventory (unsold bicycles) in a given year.
• It shows how quickly a business sells through its inventory and how effectively it balances demand, supply, and replenishment.
• Higher days may show overstock, weak sales, or poor planning.
• Since both low and high days inventory outstanding can’t be interpreted separately, an investor needs to follow a few steps while interpreting the low or high DIO –
• So you will see something like “closing stock” in the balance sheet.
• The average Inventory is the Stock you hold during a year or period.
• The inventory turnover ratio measures how many times a business sells and replenishes its stock

Aggregate potential overstock risks to avoid surprise storage fees in the US market. Monitor inventory health with average days inventory outstanding vital KPIs, alerts, and widgets to highlight potential issues. What measures does your business take in managing its supply chain? Measuring supply chain performance is essential to improve your business.

Efficiency Results

The rate is calculated by dividing the number of on-time items by total items, then multiplying the result by 100 for a percentage. This metric is calculated by dividing the total freight cost by the number of items included in the shipment. Stages with the longest lead times can be identified as areas of concern. By adding together the longest times for each stage of the cycle, you can calculate this crucial metric that evaluates the overall state of the supply chain.

For maximum visibility, implement comprehensive accounting and inventory software that automates these calculations while providing real-time insight into inventory performance trends. This holistic approach provides a complete picture of operational efficiency and working capital health. As your business grows across multiple sales channels, maintaining optimal DIO becomes increasingly challenging yet essential. For multichannel e-commerce brands operating with tight working-capital cycles, this metric reveals critical insights about operational efficiency and liquidity. Additionally, just as companies need to measure other financial metrics like DSO (Days Sales Outstanding) and DPO (Days Payable Outstanding) to manage cash flow, DIO also plays a crucial role.

Use Inventory Management Technology

DIO indicates the number of days on average that a company holds its inventory before selling it. The days inventory outstanding indicator, or DIO, is a key financial indicator that provides insights into this question. Inventory management systems or a days https://eslapercha.com/operating-profit-how-to-calculate-what-it-tells/ inventory outstanding calculator can automate tracking and spot trends faster than human workers. Instead, implement a digitized inventory management solution to manage everything from inventory to invoices to sales.

Multi-location Management

• But if you wanted to use the average inventory balance, it would just be the sum of the beginning and ending inventory balance divided by two.
• Days Inventory Outstanding (DIO) is a financial metric that measures the average number of days a company holds inventory before selling it.
• Unlike the income statement, the balance sheet is a snapshot of a company’s assets, liabilities, and equity at a specific point in time.
• No more manual number-crunching—look at financial management technology that automates DIO tracking across product lines, locations, and periods, giving you accurate insights instantly.
• It reflects the speed at which inventory moves through your business—higher inventory turnover typically signals stronger sales performance and less capital tied up in unsold goods.

Factor seasonality in your forecast to avoid stockouts and unnecessary fees due to overstocking. Efficiently manage inventory as it arrives at 3PL warehouses using a streamlined import page. Factor storage capacity into your forecasts to avoid stockouts and overstocking. Refactor total cartons and total pallets to reduce carton and pallet storage and shipping costs. Flags products that have been in stock for extended periods to avoid extra storage fees.

DIO explains how effective operations, cash flows, and working capital maximization results are achieved. A lower DIO is generally desirable, indicating faster inventory turnover. Conversely, a higher DSI suggests slower turnover, potentially indicating overstocking or weak sales.

By reducing DIO through improved inventory management practices, businesses can shorten their cash conversion cycle, improve liquidity, and potentially reduce reliance on external financing. The path to improvement begins with applying the correct days inventory outstanding formula, ensuring calculations incorporate accurate weighted-average costs including landed charges. Mastering days inventory outstanding empowers businesses to optimize working capital and generate healthier cash flow. By tightening the data used in the days inventory outstanding formula, businesses eliminate the “garbage in, garbage out” problem that plagues many inventory systems. For the first time in 20 years of running an inventory based business I TRUST what my inventory management system tells me I have in stock.” Finale’s cloud platform unites weighted-average costing with automated days inventory outstanding calculation, providing finance teams with continuous visibility into capital efficiency.

The platform also integrates with QuickBooks to promote financial visibility. Work and communicate closely with all partners to reduce lead times and enjoy more ordering flexibility — all factors that contribute to a lower DIO. Calculate your economic order quantity to find the optimal amount of stock to order.

Enables Smarter Benchmarking Within the Industry

Below is the list of top companies in the Oil & Gas Sector, along with its Market cap and inventory days outstanding. Below is the list of top companies in Discount Stores and their Market cap and outstanding inventory days. Below is the list of top companies in the Automobile Sector, along with its Market cap and inventory days outstanding. That means it takes 73 days to translate the raw materials into cash for Company Zing.

In this scenario, you’re holding inventory for roughly 91 days before it sells — information you can use to make informed decisions about stock movement. To run the DIO calculation, you just need to divide your average inventory by how much you spent to produce or procure it. A low DIO usually correlates with reduced shrinkage and lower carrying costs since selling inventory faster reduces the time you spend holding and storing goods.

Why Days Inventory Outstanding is Important for Businesses

Days Inventory Outstanding (DIO) measures the average number of days a company takes to sell its inventory. From a performance perspective, a lower DIO generally indicates faster inventory turnover, stronger sales performance, and better cash flow. Since inventory ties up working capital, this makes DIO an important indicator of both operational efficiency and financial health. Because it reflects the average age of inventory, DIO provides a clear view of how efficiently a company manages and moves its stock. Days Inventory Outstanding (DIO) is a key inventory and liquidity metric that measures the average number of days a business takes to sell its inventory. For finance and operations teams, DIO acts as a bridge between inventory management and working capital optimization.

Tracking this information along with landed cost will give you a much better understanding of how long it takes and how much it costs to prepare your goods for sale. If it is high, investigating why it’s higher than your competitors and correcting those issues can make your business more competitive. Likewise, if the standard DIO is 50 and your company’s DIO is 65, then your DIO would be considered high. If you were calculating DIO for the year, the total number of days would be 365. Finally, you’ll need to calculate the number of days in which you’re calculating DIO.

Manage Your Supply Chain

So you will see something like “closing stock” in the balance sheet. While calculating DIO, we usually take the ending inventory. On the other hand, we also need to look at the high day’s inventory outstanding. Then we multiply that proportion by 365 days, which allows us to see the proportion in terms of days. There are three components in the cash conversion cycle. Inventory days outstanding are varied for the Oil & Gas sector.

They look at stock movement and cost. For example, perishable items may need inventory days under 15. When a company holds stock for too long, it locks up money. The turnover ratio helps in adjusting stock frequency. However, while planning a sales strategy, the turnover ratio helps improve. This gives a time-based view of financial reports.

It means more capital is tied up in unsold goods, increasing carrying cost and reducing liquidity. However, extremely low DSI could indicate understocking and missed sales opportunities. This comprehensive approach ensures that all inventory carrying costs are properly reflected in your inventory valuation methods, giving finance teams true visibility into working capital requirements. The system captures all inventory movements—receipts, sales, transfers, adjustments—and automatically calculates the appropriate values needed for accurate DIO metrics. Finale Inventory addresses this pain point with purpose-built features that transform inventory turnover analysis from a manual, error-prone process into an automated insight engine.

Generally, a decreasing DIO trend indicates improved inventory management, while increases may signal inventory turnover ratio problems requiring attention. Each tactic directly contributes to measurable reductions in days inventory outstanding, improving working capital efficiency and cash flow analysis. Finale Inventory uses the weighted-average inventory method, which calculates costs based on the average of all purchases over time, unlike FIFO or LIFO approaches.