Days inventory outstanding is one of many metrics retailers need to monitor to understand store performance and the overall success of their business. We’re taking you on a deep dive through what you need to know about DIO and how to use it to make smart business decisions.
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What is days inventory outstanding (DIO)?
Days inventory outstanding (DIO) measures how long, in days, a company holds on to its inventory until it sells out. It’s also known as days sales of inventory (DSI) and days in inventory (DII).
DIO is the average number of days that a company holds its inventory before selling it. It provides a measure of efficiency in terms of how quickly a company can turn inventory into cash.
In other words, days inventory outstanding measures inventory liquidity. This is important to know because, “For most retailers, the biggest portion of your assets, almost 50% to 60%, is inventory. If you have too much inventory, a lot of your working capital is in your stock. You have paid your supplier, but you have not yet sold your inventory; you haven’t made money from it.”
In some ways, inventory is money sitting on your shelves. If days inventory outstanding is high, that means more of your money is stuck on your shelf. And low days inventory outstanding means you are making money faster, because less money is stuck on your shelves.
Days inventory outstanding is almost meaningless when it’s in a vacuum. To give this metric meaning, you need to compare it with your competitors’ DIOs and to your past performance,” Ray explains.
If last year you were working with 100 days of inventory outstanding and this year it is 90; that is good. If last year you were working with 80 DIO and today, it is 90, that is bad.
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.
“You cannot,” says Ray, “compare the days of inventory outstanding of 7-Eleven to Walmart or Walmart to Home Depot. Each sector has to compare to its own direct competitors. Convenience store 7-Eleven can compare itself to Wawa. Walmart can compare itself to a Target. Home Depot can compare to Lowe's.”
Importance of days inventory outstanding
Days inventory outstanding is one of many metrics retailers view to track store performance.
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.
Better understanding of cash flow
DIO indicates how long it will be until the inventory you’ve bought will be purchased by a customer and turned back into cash. Being able to predict cash flow can help you make plans for expanding your business, hiring new staff, buying new display fixtures, and more.
💡 PRO TIP: Take control of your cash flow with Shopify Payments. 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.
Inform marketing and pricing decisions
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.
For 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.
If a product is selling faster than expected, you may be able to test the market by raising prices.
Avoid overstocking and understocking
Knowing your DIO can help you forecast your inventory needs so you can avoid over- or understocking.
For 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. DIO can thus help you set a reorder point.
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.
Days inventory outstanding formula
The formula for calculating days inventory outstanding is:
Days Inventory Outstanding = (Value of Inventory/Cost of Goods Sold) x 365 days
To find Value of Inventory you can either use the ending value of the inventory in question, or the average value of that inventory: the starting value minus the ending value divided by 2.
💡 PRO TIP: To find your inventory value for a period of time in Shopify admin, view the Month-end inventory value report. For COGS, view your Finances summary.
365 days is what you should use when you want to find DIO over one year. If you want to calculate DIO for a shorter period of time, change 365 to 90 days for a quarter, 30 days for a month, etc.
DIO calculation example
Let’s pretend you run a boutique. The quarter has come to an end, and you want to run some metrics on your store.
You’ve noticed that candles have become some of your bestselling products and you want to know if they’re selling faster this quarter than they were last quarter.
First, you look at your POS reports to find the value of the remaining candles you have in stock. You have a dozen candles left, and their combined value is $240. So, your Value of Inventory is $240.
According to POS reports, the COGS for your entire candle inventory for that quarter is $500.
Because you’re calculating DIO for the quarter, you substitute 90 days for 365 in the original formula. So you're new formula would look like:
- Days Inventory Outstanding = (240/500) x 90
Which would give you the following DIO:
- Days Inventory Outstanding = 43.2
Your DIO is 43.2 days, which means it takes about 43 days (roughly half a quarter) for you to sell your entire candle inventory.
According to a past calculation, your DIO for candles for last quarter was 60. Because your current DIO is less than 60, that shows that you’re selling candles more quickly than before. Well done!
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Days inventory outstanding vs. inventory turnover ratio
If you’ve done your research on retail metrics, you’ve probably come across inventory turnover ratio, which sounds very similar to DIO. So, what’s the difference between the two?
“Inventory turnover ratio (ITR) refers to the number of times a company sells its inventory during a given period, such as a year. A high ITR means that goods are sold faster and is desirable. It means less inventory is on the shelf, resulting in lower holding costs, and allows retailers to offer newer products to customers,” says Cohen.
DIO and ITR are similar metrics: ITR refers to the number of times the company turns its inventory over a given period, whereas DIO refers to the number of days it takes to complete one turnover.
How to improve days inventory outstanding
- Improve forecasting
- Increase marketing
- Get rid of dead stock
Here are some strategies for reducing days inventory outstanding and increasing inventory turnover.
When you improve demand forecasting, you can be more certain that you’re ordering the right amount of stock so it doesn’t take too long to sell. Review your POS reports and focus in on historical sales to understand how long products will sit on your shelves.
Give products that are slow to come off the shelves a marketing boost.
Feature them prominently in store displays, your window, sales, and social media posts. Bundling slow-moving products with bestsellers is another way to sell more quickly.
Get rid of dead stock
Donating dead stock will bring down your DIO and get you a tax deduction for the value of the merchandise. You’ll also get good PR for donating to a cause your customers care about if you tell them about it through your marketing channels.
Reduce DIO at your store
DIO measures how long your store holds onto inventory before it sells out. Compare your DIO to your store’s past performance and to competitors’ DIOs to understand whether you’re selling as quickly as you’d like.
Manage inventory from one back office
Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.