The formula for calculating days inventory outstanding is: Days Inventory Outstanding = (Value of Inventory/Cost of Goods Sold) x 365 days If you reorder inventory based on instinct rather than DIO, you’ll end up with too much invested in stock and not enough cash on hand. DIO can thus help you set a reorder point. Knowing your DIO can help you forecast your inventory needs so you can avoid over- or understocking.įor instance, if you know your DIO is 12 days, you’ll reorder stock just in time to get it in before you run out, rather than having too much on hand. If a product is selling faster than expected, you may be able to test the market by raising prices. When you know theoretically how long something is supposed to take to sell, but it takes more or less time to do so, that can help you decide how to price or market items to give them an extra sales boost.įor example, if certain types of products have a longer DIO than others, or if products have DIOs higher than your benchmark, it may be time to apply retail markdowns or create a promotion to push sales of those items. Get a complete view of your business finances, know when to expect payouts, track in-store and online sales and payments, and manage your money where you run your business. □ PRO TIP: Take control of your cash flow with Shopify Payments. Being able to predict cash flow can help you make plans for expanding your business, hiring new staff, buying new display fixtures, and more. Better understanding of cash flowĭIO indicates how long it will be until the inventory you’ve bought will be purchased by a customer and turned back into cash. Gaining a better understanding of your cash flow, empowering informed marketing and pricing decisions, and avoiding over- and understocking are some of the reasons it’s important to know your DIO. Home Depot can compare to Lowe's.” Importance of days inventory outstandingĭays inventory outstanding is one of many metrics retailers view to track store performance. Convenience store 7-Eleven can compare itself to Wawa. Each sector has to compare to its own direct competitors. “You cannot,” says Ray, “compare the days of inventory outstanding of 7-Eleven to Walmart or Walmart to Home Depot. When it comes to comparing your performance to that of competitors, it’s important to find stores that sell the same type of products to similar customers and in similar markets. If last year you were working with 80 DIO and today, it is 90, that is bad. If last year you were working with 100 days of inventory outstanding and this year it is 90 that is good. To give this metric meaning, you need to compare it with your competitors’ DIOs and to your past performance,” Ray explains. But what is a good DIO, and what’s a bad one?ĭays inventory outstanding is almost meaningless when it’s in a vacuum. Saibal Ray, James McGill Professor and Academic Director at McGill University’s Bensadoun School of Retail Management in the Desautels Faculty of Management.Ī low DIO, in other words, indicates effective marketing, pricing, and inventory management. And low days inventory outstanding means you are making money faster, because less money is stuck on your shelves. If days inventory outstanding is high, that means more of your money is stuck on your shelf. In some ways, inventory is money sitting on your shelves. You have paid your supplier, but you have not yet sold your inventory you haven’t made money from it.” If you have too much inventory, a lot of your working capital is in your stock. This is important to know because, “For most retailers, the biggest portion of your assets, almost 50% to 60%, is inventory. In other words, days inventory outstanding measures inventory liquidity. Maxime Cohen, Scale AI Chair Professor of Retail and Operations Management at McGill University’s Desautels Faculty of Management It provides a measure of efficiency in terms of how quickly a company can turn inventory into cash. It’s also known as days sales of inventory (DSI) and days in inventory (DII).ĭIO is the average number of days that a company holds its inventory before selling it. What is days inventory outstanding (DIO)?ĭays inventory outstanding (DIO) measures how long, in days, a company holds on to its inventory until it sells out.
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