Days Inventory Outstanding Calculator

The main work of calculating the DIO of a business involves gathering the correct information from financial statements (and elsewhere) and plugging them into the formula. There are four steps in the DIO calculation.

1. Calculate the average inventory by adding the period’s beginning and ending inventory balances then dividing by two. You can find the inventory balance on the company balance sheet 
2. Find the company’s cost of goods sold (COGS) as listed on the income statement. 
3. Determine the number of days in the accounting period. 
Calculate DIO using the days inventory outstanding formula.

Let’s do an example together.

The owners of Junglefy, a houseplant nursery, want to calculate their DIO for 2022. Their beginning inventory balance was $21,490, and their ending balance was $11,850. That brings their average inventory to $16,670.

$16,670 Average inventory = ( $21,490 Beginning inventory + $11,850 Ending inventory) / 2

The cost of goods sold is $137,780 and the number of days in the accounting period is 365. We can plug these figures into the days inventory outstanding formula to get a DIO of
 
33.56 DIO = ($16,670 Average inventory / $137,780 COGS) * 365

Overall, Junglefy has a fairly healthy DIO. Of course, it never hurts to improve.

Days inventory outstanding (DIO) is the liquidity ratio that indicates how much of a business’s money, aka capital, is tied up within its inventory. Inventories are considered a business asset, but they are illiquid. Businesses cannot easily convert them into cash. It’s important for businesses to keep less in their inventory, thus freeing up funds for use elsewhere.

Businesses that track their DIO are more likely to make better use of their working capital. Businesses can also use their days inventory outstanding to improve their product pricing, sales, and marketing strategies. 

There is no universal “good“ DIO ratio. Every industry will have its own average, so business owners should look at industry averages for benchmarks. A low DIO is typically preferred, as it indicates higher inventory turnover and optimal inventory management. These traits indicate strong cash flow.

Higher DIO may indicate low demand for products and services. It may also indicate a need for strategic marketing and improved sales processes. It’s useful to closely examine all parts of the customer process to uncover opportunities to improve your inventory turnover. A high days inventory outstanding might also highlight opportunities for off-loading inventory and incurring a write-down.

There are several strategies business owners can use to improve their days inventory outstanding (DIO) ratio:

1. Analyze sales data to identify slow-moving or overstocked items, and adjust production or purchasing accordingly.
2. Improve inventory management system with software that tracks inventory levels and automates parts of your workflow.
3. Improve forecasting with historical sales data, market trends, and customer demand to improve forecasting and reduce overproduction.
4. Improve marketing and sales strategies and consider hiring a professional marketing and sales consultant. 
5. Review pricing strategies to ensure products are priced competitively and discounts are offered exclusively on slow-moving items.
6. Improve customer service by providing quick response to customer complaints and encouraging customer feedback and reviews. 
7. Review supplier performance, negotiate better payment terms, and look for alternative suppliers if necessary.

Both a business’s DIO and DSO provide important information about its cash flow and financial stability. And both — plus days payable outstanding (DPO) — are important parts of the cash conversion cycle (CCC). But they differ in important ways.

The DIO measures a company’s inventory management efficiency by measuring the average number of days a piece of inventory remains in the store. DIO is calculated by dividing the average inventory balance by the daily cost of goods sold. A low days inventory outstanding number indicates that a company knows how to manage its inventory efficiently. 

The DSO measures a company’s accounts receivable efficiency or the average number of days a business takes to collect payment from its customers. It’s calculated by dividing total accounts receivable by total sales per day.