Inventory is one of the largest operating expenses that impacts liquid asset availability for businesses that make or sell physical products. To ensure your business stays competitive it’s important to understand and track inventory metrics such as days inventory outstanding (DIO) to provide insight into business performance.
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What is Days Inventory Outstanding and How to Calculate It
Days Inventory Outstanding Meaning
Days inventory outstanding, sometimes called inventory days of supply or days sales of inventory (DSI), is a financial metric measuring the average number of days it takes for a company to sell its inventory. It provides insights into how efficiently your company manages its inventory and the speed at which you can convert stock into sales.
Therefore, a lower DIO result is preferable because it indicates that inventory is moving at a faster pace and contributing to company revenue and ultimately, profit.
Why Should Businesses Calculate Days Inventory Outstanding?
If you monitor and analyze days inventory outstanding you can better identify issues early, like overstocking, slow-moving inventory, or inefficiencies in the supply chain. Identifying trends early on allows you to forecast for the future and make metric-based decisions on production, purchasing, pricing, and inventory optimization.
By regularly tracking DIO, your business can reap many operational and financial benefits including:
- Reducing overstock and stockout
- Reducing risk of inventory shrinkage, depreciation, or expiration
- Lowering carrying costs
- Improving order fulfillment rate and speed
- Improving inventory planning
- Improving cash flow
- Improving profitability
- Improving working capital management.
Days Inventory Outstanding Calculator
Calculating your days inventory outstanding is essential for understanding the intricacies of your inventory management and supply chain. Luckily, QuickBooks has done the hard work for you with our DIO calculator.
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How to Use QuickBooks Days Inventory Outstanding Calculator
Want to know how to use our DIO calculator? It’s straightforward and easy to use! Simply calculate your average inventory value, and calculate your cost of goods sold (COGS) per day. Input these into our QuickBooks DIO calculator to get your days inventory outstanding calculation.
What is the Days Inventory Outstanding Formula?
The Days Inventory Outstanding (DIO) formula involves just three calculations. You need to work out your business’s average inventory value and divide it by the cost of the goods you sell per day. See the DIO formula below:
Days Inventory Outstanding = (Average Inventory Value / Cost of Goods Sold per day)
You need two key components before doing the Days Inventory Outstanding calculation:
- the average inventory value and
- the cost of goods sold (COGS) daily
To calculate your average inventory value, use our average inventory calculator. To calculate your costs of goods sold, use our cost of goods sold calculator.
How to Calculate Days Inventory Outstanding Step by Step
Calculating your DIO is easy. Simply follow these steps:
Step 1: Determine the Average Inventory Value
- To calculate Days Inventory Outstanding, choose a specific period for which you want to calculate DIO (e.g., monthly, quarterly, or annually).
- Add the inventory values at the beginning and end of the chosen period.
- Divide the sum by 2 to get the average inventory value.
Average Inventory Value = (Beginning Inventory + Ending Inventory) / 2
Step 2: Calculate the Cost of Goods Sold (COGS) per day
- Determine the total cost of goods sold during the same period you selected in Step 1.
- Divide the COGS by the number of days in the period.
COGS per day = Total COGS / Number of Days in the Period
Step 3: Calculate Days Inventory Outstanding
- Divide the Average Inventory Value by the COGS per day.
Days Inventory Outstanding = Average Inventory Value / COGS per day
The resulting value represents the average number of days it takes to sell your inventory based on the given period and corresponding COGS.
Manage your Inventory with QuickBooks
Staying up to date with your DIO is essential for understanding your inventory and supply chain. QuickBooks powerful inventory management software allows you to automate your DIO calculations by recording and monitoring your inventory levels. You can create item records for your products, track quantities on hand, and record purchases and sales.
QuickBooks also automatically calculate COGS based on your inventory transactions. It considers the cost of items sold and adjusts your inventory and financial records accordingly, allowing you to fill in our DIO calculator automatically.
If you’re ready to automate your inventory management, sign up for QuickBooks or try a free 30-day trial today.
