It is important for businesses to know what their days inventory outstanding (DIO) and how to calculate it. Every business’s responsibility is to turn its inventory into completed goods. The business won’t be capable of selling and generating revenue unless it has the final goods in its possession. For your retail business, you also should track your inventory to ensure that it is in good condition. You can utilize an Inventory Software which automates the process for you.
An investor should therefore consider how long it takes a business to convert its inventory into sales. For this matter, retailers should know how to calculate their days inventory outstanding (DIO). First of all, DIO is a monetary indicator that shows the investor how well the business manages its inventory. To assist you in managing inventory, you can also use Inventory Software. Before you implement it for your retail business, take a look at the pricing scheme calculation for inventory software.
Also read: Stock Management System Benefit for Retailers
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What is Days Inventory Outstanding?
Days Inventory Outstanding (DIO) is a financial ratio that measures how long an organization typically keeps inventory before selling it to customers. It gives an overview of the cost of retaining inventory as well as possible causes for the delay of inventory sales. DIO also has several other terms such as days sales of inventory or days in inventory. Additionally, you may also utilize inventory software from HashMicro to help you track your inventory.
DIO displays the inventory liquidity and also serves as a gauge of a business’s operational and financial effectiveness. A low days inventory outstanding indicates that inventory is transformed to cash more rapidly, whereas a high DIO indicates that inventory liquidity is weak. Comparisons of DIO between industries are pointless because the DIO varies so significantly depending on the industry.
The Formula and Calculation of Days Inventory Outstanding
You can use a certain formula to calculate DIO. The following formula is typically used to calculate DIO.
Days Inventory Outstanding = (Average inventory / cost of sales) x number of days
- Average inventory: Inventory valuations might be based on either the final value at the conclusion of the reporting period or the average value throughout the period.
- Cost of sales: Refers to the total amount spent on inputs like materials, labor, and energy that went into making the finished goods that were sold within the time frame in question.
- Number of days: This corresponds to the total number of days that comprise the period in question.
There is also another method to calculate days inventory outstanding by dividing the number of days by the ratio of inventory turnover.
DIO = Number of days / Inventory turnover
Days Inventory Outstanding Examples
Now, we will give you some examples of calculating days inventory outstanding.
1, Company X’s inventory is $60,000 while the cost of sales is $300,000 within 365 days in period. To calculate company X’s days inventory outstanding, you can use the formula above.
Days Inventory Outstanding = (Average inventory / cost of sales) x Number of days
DIO = (60,000 / 300,000) x 365
DIO = 1 / 5 x 356
DIO = 73 days.
Thus, company X’s DIO is 73 days
2. Company A’s average annual inventory is $3,000 while the cost of sales is $35,000 within 365 days in period.
DIO = (3,000 / 35,000) x 365
DIO = 31.29 days.
Thus, company A’s DIO is 31.29 days
How to Improve Days Inventory Outstanding?
A lower DIO is often viewed as more desirable than a greater DIO. DIO can be decreased by either increasing the rate at which inventory is turned into sales or by lowering the amount of inventory kept. There are also few strategies for businesses to use for decreasing their DIO such as:
- Enhancing the stock levels
- Resolving any discrepancy between sales projections and actual sales by improving the precision of planning and forecasting. If you can predict sales with better precision, you can reduce the amount of stock you have on hand.
- Accelerating the selling process will result in a quicker conversion of inventory into revenue.
- Boosting demand through the use of more efficient marketing techniques
- Getting rid of outdated or underperforming inventory, for instance by providing discounts or free shipments
Also read: 4 Ways Inventory System Increases Sales in A Retail Business
Knowing your retail business’ days inventory outstanding (DIO) is important for your operational process. DIO is a financial ratio that shows how long a business keeps their inventory before distributing to customers. This information is important for your business and investor. Additionally, you can utilize Inventory Software to help you automate the tracking and managing process.
With DIO, your retail business can see how long your inventory usually lasts and turn into sales. This way, you can make greater business decisions and avoid losses. Implementing Inventory Software is also a good way to assist you in managing your inventory efficiently. Register yourself to get a free demo now!