Days Inventory Outstanding Formula

Days Inventory Outstanding Formula and Example

Calculating Inventory Performance

Days Inventory Outstanding (DIO) is a financial ratio that measures the average number of days it takes to sell an inventory. It indicates how efficiently a company manages its inventory and how quickly it can convert it into cash.

DIO Formula

The formula for DIO is:

DIO = Average Inventory / Cost of Goods Sold (COGS) x Number of Days in Period

Where:

  • Average Inventory = (Beginning Inventory + Ending Inventory) / 2
  • COGS = Cost of goods sold during the period
  • Number of Days in Period = 365 days for a year or the actual number of days in the period

Example Calculation

Suppose a company has the following information for a year:

  • Beginning Inventory: $50,000
  • Ending Inventory: $75,000
  • COGS: $300,000

Calculating the average inventory:

Average Inventory = (50,000 + 75,000) / 2 = $62,500

Calculating the DIO:

DIO = 62,500 / 300,000 x 365 = 73 days

This means that it takes the company an average of 73 days to sell its inventory.

Interpretation

A high DIO indicates that the company is holding on to its inventory for a long time, which can lead to increased storage costs and obsolescence. A low DIO indicates that the company is efficient in managing its inventory and is selling it quickly.

DIO can be compared to industry benchmarks or historical performance to assess its efficiency. It can also be used to identify areas for improvement in inventory management.


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