Days inventory outstanding

The average number of days inventory sits before it is sold: average inventory over cost of goods sold, times the days in the period.

DefinitionThe average number of days inventory sits before it is sold: average inventory over cost of goods sold, times the days in the period.

Days inventory outstanding (DIO) measures how long cash is tied up in stock. It is one of the three parts of the cash conversion cycle, with days sales outstanding and days payable outstanding. Lower DIO frees cash; too low risks stockouts.

How it is computed

DIO = average inventory / cost of goods sold x days in the period. Average inventory is (opening + closing) / 2. Use cost of goods sold, not revenue, because inventory is carried at cost.

Example

Average inventory of $450,000 and annual cost of goods sold of $3,650,000 give DIO of $450,000 / $3,650,000 x 365 = 45 days.

Where it goes wrong

Dividing by revenue, which understates DIO; a year-end count taken after a clearance sale; and one total that hides slow lines behind fast ones. Compute it by product group as well. The full guide is days inventory outstanding.

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