An Inventory Management System provides real-time insights into stock levels, inventory turnover ratio rates, and demand patterns—crucial for reducing DIO. If you’re holding onto inventory for too long, you’re tying up valuable capital and increasing storage costs. On the other hand, moving stock too quickly without proper planning can lead to stockouts and lost sales. Striking the right balance is crucial—this is where Days Inventory Outstanding (DIO) comes in. Days inventory outstanding is a crucial inventory and cash flow metric because it tells how much time your company needs to turn inventory into cash.
Operational Efficiency
Disconnected inventory across fulfilment channels leads to some stock being unavailable where it’s needed average days inventory outstanding and overstocked where it’s not. That kind of imbalance is an inventory nightmare and a DIO accelerant. You’ve got a low-velocity product sitting in five regional warehouses. Not only are you paying for storage in each location, but you’re also complicating replenishment and reporting without adding any real value to customer service.
Creditors and lenders also consider a company’s DIO when assessing creditworthiness and risk. A company with a low DIO indicates a strong ability to convert assets into cash, suggesting better liquidity and a reduced risk of financial strain. This provides lenders with confidence in a company’s capacity to meet its short-term financial obligations. Understanding and managing DIO is important for maintaining a competitive market position and ensuring long-term financial stability.
A declining DIO may signal improved profitability potential and management effectiveness. Conversely, a rising DIO could raise concerns about inventory management challenges or slowing sales growth. It signifies efficient operations and responsiveness to market demands.
High DIO: A Potential Warning Sign
A shorter DIO means quicker sales and faster cash inflow, which improves liquidity. Conversely, a longer DIO ties up cash in unsold inventory, which can strain a company’s working capital. DIO is crucial for both companies and investors as it provides insight into how efficiently a company is managing its inventory.
Inventory Turnover Ratio vs. Inventory Days
Improving the accuracy of sales forecasting is essential for aligning inventory levels with actual demand. The more precise the forecast, the less need there will be to hold excess inventory, reducing DIO. High DIO can also point to overstocking, which can lead to increased storage costs and the risk of holding obsolete stock that might never be sold. Days Inventory Outstanding (DIO) can vary significantly across different industries, so comparing a company’s DIO with sector peers is essential for drawing meaningful conclusions. The DIO metric sheds light on how efficiently a business is converting its inventory into sales.
In this case, our beginning inventory was $200,000 and our inventory was $300,00, giving us an average inventory of $250,000. When overdue accounts go past 120 days, the lesser your chances of collecting. If that happens, you stand to lose that amount on your pretax income. You may also lose out on an opportunity to expand or otherwise enhance your business because you won’t have the cash to invest.
Clear Out Slow-Moving Inventory
- Manufacturers, retailers, and small businesses use DIO to manage supply chains more effectively.
- Both can be achieved with the implementation of cloud-based inventory software.
- And if you send the account to a collection agency, they may collect a percentage of the balance.
- Discover how Shields Childcare Supplies captured new business by offering Net 90 terms with Resolve, improving cash flow and customer relat…
- A low DIO typically signals that a company is moving its inventory more quickly, freeing up working capital for other uses.
- By employing more effective marketing strategies, businesses can drive up sales, helping inventory turn over faster and converting it into cash more quickly.
Slow-moving stock can quietly drain your resources and stall growth. That’s where Days Inventory Outstanding (DIO) becomes a powerful tool. It helps you measure how quickly your business turns inventory into sales. DIO is affected by how quickly stock arrives and how efficiently it is replenished. A poor warehouse layout slows down picking times and delays order fulfilment, indirectly impacting inventory turnover. Although the calculation reveals a rising COGS, which implies this business is experiencing sales growth, increasing inventory levels and DIO aren’t ideal and may hamper progress.
Fashion, beauty products, and electronics are all great examples of this. These industries face sharp demand fluctuations often, sometimes within months. Larger e-commerce companies with more to lose forecast sales and devise strategies several years in advance.
- In the next step, we will carry forward the inventory turnover assumption of 5.0x and the DIO assumption of 73 days to project future inventory levels.
- Days inventory outstanding shows you the average, but ageing reports tell the full story.
- Most companies calculate DIO on an annual (365), quarterly (90), or monthly basis (30).
- The most effective way to use a DIO ratio is to compare yours with the industry average.
Dissatisfied customers may go to your competitors and not return, which could result in lost revenue now and in the future. In the next step, we will carry forward the inventory turnover assumption of 5.0x and the DIO assumption of 73 days to project future inventory levels. Based on that information, we can calculate the inventory by dividing the $100mm in COGS by the $20mm in inventory to get 5.0x for the inventory turnover ratio in 2020. Note that the average between the beginning and ending inventory balance can be used for both the calculation of inventory turnover and DIO. In order to efficiently manage inventory and balance idle stock with being understocked, many experts agree that a good DSI is somewhere between 30 and 60 days. This, of course, will vary by industry, company size, and other factors.
A higher ratio indicates a company with poor collection procedures and customers who are unable or unwilling to pay for their purchases. Companies with high days sales ratios are unable to convert sales into cash as quickly as firms with lower ratios. A financial ratio called inventory turnover indicates how frequently a business rotates its stock in relation to its cost of goods sold (COGS) during a specific time frame.
When a company’s Days Sales Outstanding is high, it becomes much harder to predict incoming cash. This affects how accurately teams can plan budgets or forecast spending. Hope you enjoyed the demo.For more, check out how our customers use Bob. The more tailored your calculations, the more strategic value you can extract from your data. These insights are already in your general ledger and revenue data—you just need the right tools to access them.
We are using 30 days as a standard number of days for one month, but this, too, can be adjusted to reflect a specific month or number of working days within this period. The answers to these questions may indicate that a new sales strategy is necessary. This could mean that the solution is better market research, marketing, and product development. Or the answers may indicate that the problem is not your sales strategy, but how and when you get goods to the customer. This formula also contributes to the equation needed to determine your cash conversion cycle. Let’s analyze the day’s inventory outstanding example data below using ChartExpo.
By tracking and calculating DIO regularly, you’ll gain insight into how your inventory practices affect working capital and long-term growth. With better DIO management, you’re not just optimizing your stock; you’re boosting your business’s bottom line. Your warehouse is 90% full, but 40% of that is made up of inventory with over 150 days. That’s inefficient space usage that’s likely costing you both time and money. But a deeper dive reveals that 20% of your SKUs haven’t moved in six months.
As a WMS Industry Analyst & Content Lead I write about warehouse management systems from real experience—helping businesses streamline operations, reduce errors, and scale smarter. So, this business holds inventory for an average number of 73 days before selling it. A higher DIO means cash is tied up in unsold inventory, while a lower DIO indicates a steady cash flow. If they’re not important to your business, transferring the focus from these laggards to more high-demand, cost-effective products can greatly improve DIO and revenue over time. Using the figures from our earlier pharmacy example, the inventory turnover for John’s Pharmacy would be 6.7. This means that the pharmacy replenished its stock just under seven times in one year.