Generally speaking, the lower a company’s DIO, the better. Now that we know how to calculate DIO, what can we do with this information? How to use the days inventory outstanding ratio So, in our first month of operations, our DIO was 10 days. Plugging those numbers into the formula, we get:ĭIO = ($10,000 / $30,000) * 30 days = 10 days We just completed our first month of operations, and we need our days inventory outstanding calculation. We make and sell shoes for both men and women. Welcome to ThriftyShoes, our discount shoe manufacturing company. For example, if you’re measuring DIO for a month, you need to make sure that both your ending inventory and cost of goods sold numbers are for that same month. It’s important to note that the DIO formula only works if you use consistent accounting methods and period lengths.
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Average Inventory - Measure the average inventory value throughout the given period by adding the beginning and ending inventory, then dividing by two.The formula for days inventory outstanding is pretty simple:ĭIO = (Average Inventory/Cost of Goods Sold) x Days in Period
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If you’re wondering how to find days inventory outstanding for your own business, it’s quite easy. How to calculate days inventory outstanding Thus, you want a high inventory turnover ratio and a low DIO. DIO measures how long it takes to sell inventory, while turnover measures how often inventory is sold. It’s important to remember that days inventory outstanding and inventory turnover are two different metrics that provide different information.
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In contrast, a low inventory turnover might be an indication that products aren’t selling as quickly as they could be or that the company is carrying too much inventory. In other words, it tells you how often inventory levels are replenished.Ī high inventory turnover is generally seen as being good since it indicates that products are selling quickly and that not too much cash is tied up. Inventory turnover is a metric that measures the number of times a company’s inventory is sold and replaced over a given period. However, these two terms are not the same. Inventory turnover vs days inventory outstandingĪnother term, inventory turnover, is also often conflated with days inventory outstanding. Importantly, DIO should not be confused with days sales outstanding (DSO), which is a similar metric that measures the number of days it takes a company to collect payment after making a sale, or days payables outstanding (DPO), which measures the number of days it takes a company to pay invoices or creditors.īoth DSO and DPO are important metrics, but they provide different information. If the DIO trend is increasing, that might be an indication that future sales will decrease. Finally, DIO can be a helpful tool for forecasting future sales.A lower DIO ratio usually indicates that a company is doing a better job of managing inventory. DIO can also be used to compare a company’s performance to that of its competitors.However, if products are sitting on shelves for too long, it could be an indication that the company is overproducing or that demand has decreased. If the inventory is turning over quickly, that’s usually a good sign. It can be used to assess how well a company is managing inventory processing.Understanding the days inventory outstanding definition is important for a few reasons: In other words, it tells you how long a product sits on shelves before a customer buys it. Days inventory outstanding (DIO), also known as days in inventory, is a metric used to measure the average number of days that a company’s inventory remains unsold.