John’s Pharmacy wants to calculate its DIO for the last financial year. The beginning inventory value was $100,000 and the ending inventory value was $200,000. This means the average inventory value for John’s Pharmacy is $150,000.
Strategies to improve Days Inventory Outstanding (DIO)
The switch toggle in the top right corner cycles between the two methods to forecast the inventory balance. An increase in an operating working capital average days inventory outstanding asset, such as inventory, represents an “outflow” of cash. If you have a high DIO, it means that you’re holding onto your inventory for too long.
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To manufacture a salable product, a company needs raw material and other resources which form the inventory and come at a cost. Additionally, there is a cost linked to the manufacturing of the salable product using the inventory. DSI is calculated based on the average value of the inventory and cost of goods sold during a given period or as of a particular date. Mathematically, the number of days in the corresponding period is calculated using 365 for a year and 90 for a quarter. Days inventory outstanding — regularly abbreviated as DIO — is a financial metric that measures the average number of days it takes your company to sell its entire inventory.
- Where DOI measures how quickly inventory is converted into liquid assets, inventory turnover rate simply measures the number of times stock on hand is sold and replenished in the period analyzed.
- On the job, it is far more common to see models that project inventory using the DIO approach (often denoted as “Inventory Days”) than based on turnover days.
- Therefore, it is important to compare the value among the same sector peer companies.
- You may find that some products cost you a relative fortune to produce and store but don’t earn much in sales.
Comparing DIO to inventory turnover ratio
In this article, you’ll discover how DIO, as a key performance indicator, can help you drive down your inventory levels, reduce costs, and improve operational efficiency. Fast-moving consumer parts often result in shorter DIO, while specialty items might take longer to sell. Understanding different inventory types helps you manage stock better and optimize DIO in any industry.
Days Inventory Outstanding Calculation Example
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DIO is used alongside DSO and DPO to get a broader picture of overall operational efficiency. DIO can be used as a good metric for understanding how new procedures that are implemented impact efficiency. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Furthermore, the company’s COGS are expected to grow each year at a constant 5% growth rate year-over-year (YoY).
Or else, we can also take the average of the beginning and the ending inventory. To find out the average, all we need to do is add up the beginning and ending inventory, and then we need to divide the total by two. Company Zing has an inventory of $60,000, and the cost of sales is $300,000. Since Walmart is a retailer, it does not have any raw material, works in progress, and progress payments.
It helps us understand the proportion of raw materials in the total cost of sales. Then we multiply that proportion by 365 days, which allows us to see the proportion in terms of days. If the company’s DIO is shorter than its peers, it means that it has a very efficient inventory management system.
However, if the calculation results in a larger number, this indicates a higher turnover because the value of COGS in relation to the inventory is much higher. Inventory turnover is a metric similar to DIO and uses some of the same data. Evaluating inventory and eliminating or cutting back on less popular products may also help lower the DIO overall. 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. Let’s say your inventory total as of January 1, 2023, is $115,000 and your ending inventory total for March 31 is $145,000, the total inventory would be $260,000. Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.
Going lean in business means trimming the fat from wasteful activities. A lean business can operate effectively and efficiently while holding very little stock, which minimises the total costs of your inventory. Automating your workflows and tracking stock in real-time is essential for optimised inventory management. Both can be achieved with the implementation of cloud-based inventory software. You might over-purchase a raw material if you expect it to be in short supply soon. This can result in a higher-than-normal DIO that doesn’t reflect poor business performance.