When you order stock for your retail store, how do you know how much to buy? Do you look at past sales, make predictions based on upcoming trends, or just pick a number and hope for the best? A retail company’s inventory management is at the core of an efficient business—and an important part of this is figuring out the balance between storage costs and stock levels.
That’s where days sales in inventory comes in. A financial ratio comparing inventory size and sales rate, DSI is a useful figure that can help you track inventory levels in relation to your sales—which lets you see if you’re selling at a rate that makes your storage costs worth it. Here’s what ecommerce businesses need to know about DSI and how to calculate it.
What is days sales in inventory (DSI)?
Days sales in inventory (DSI) tells you the average number of days it would take to turn your average inventory into cash. This particular ratio is known by many names—“average days sales of inventory,” “days inventory,” “days inventory outstanding (DIO),” “inventory days,” or just “days in inventory.” It’s a useful figure that tells you whether or not your products are selling at a good pace vis a vis the size of your inventory. An ideal DSI is typically between 30 and 60 days, though this will vary by industry and the size of the business.
How to calculate DSI
The formula to calculate your company’s days sales in inventory looks like this:
DSI = (Average inventory / Cost of goods sold) x 365
To use this formula, you’ll divide your average inventory by your COGS, then multiply the result by 365—the number of days in a year. The product is how many days it would take to sell your average inventory.
Here’s a closer look at the two variables in the DSI formula that you’ll need in order to calculate it:
1. Average inventory
Average inventory is the cost of the stock you have on hand at any given time. To calculate your average inventory, add your beginning inventory and ending inventory for the year, then divide it by two.
The cost of goods sold (or COGS) is the cost of products you sold over the course of the year. It usually consists of materials, manufacturing, and labor costs. To calculate COGS for your business, take the cost of your beginning inventory, add any additional inventory purchases you made during the year, and then subtract your ending inventory.
You can find data for your average inventory and COGS on your annual financial statements. If you sell through Shopify, you can find your COGS in your inventory reports.
Example of a DSI calculation
Say you own moderately-priced jewelry, and you want to calculate days sales ininventory for your retail store’s first year. On January 1, you have $100,000 worth of jewelry to sell, and on December 31 you have $80,000 worth of stock. Additionally, your COGS for the year was $400,000.
Next, you need to determine your average inventory. Based on the formula above, average inventory is ($100,000 + $80,000) / 2 = $90,000
Finally, plug these numbers into your formula:
DSI = (Average inventory / Cost of goods sold) x 365
DSI = (90,000 / 400,000) x 365
DSI = ~82
This means that, on average, it will take your business 82 days to sell the inventory you have on hand.
What is a good DSI?
An ideal DSI is typically between 30 and 60 days. Of course, this number varies by industry—a business in the high-end jewelry industry typically sees slower sales rates (and therefore will have a higher DSI) than a business selling t-shirts. The size of the business will also play a role in DSI; if your business is small, you may sell your inventory more slowly than a large business with a robust marketing infrastructure.
A low DSI means a business can turn its entire inventory into sales quickly—typically an indicator of healthy, efficient sales at an optimal inventory level. However, if your DSI is too low (for example, shorter than a month), it could be a sign you need to increase the size of your inventory or safety stock or run the risk of a stockout.
A high DSI value (for example, longer than two months) means a business’s inventory will take a long time to turn into sales—which could mean either sales are too slow or the company is holding too much inventory at any given time. However, there are certain situations in which a company may choose to increase its DSI. For instance, if there’s a forecasted supply chain shortage of a particular product, they might temporarily increase their inventory of the product to avoid running out later.
Ways to optimize days sales in inventory
You can optimize your DSI in a few ways:
If you consistently find that your DSI is higher than you’d like, it could be that you’re storing excess stock. Reducing the size of your inventory can help alleviate unnecessary storage costs and reduce staffing needs—all while decreasing your DSI. Conversely, if your DSI is too low, you may want to increase your inventory so you don’t run out. Effective inventory management allows you to strike the right balance.
Increase marketing efforts
To decrease the number of days it takes to sell your stock, you can work to increase your rate of sales. Marketing campaigns, promotions, discounts, and referral systems can get the word out about your products and incentivize quicker purchases.
Track trends and forecast fluctuations
Demand is often subject to consumer interests, seasonality, economic trends, and more. By understanding and predicting these fluctuations, you can maintain an inventory size responsive to trends in demand, avoiding unnecessary storage or obsolescence.
Days sales in inventory FAQ
What does it mean when a days sales in inventory increases?
When DSI increases, it means that it will take more days to sell your stock of inventory items. This is a sign that either the rate of sales has decreased or the size of your inventory has increased.
Can DSI be affected by external factors?
DSI can be affected by external factors that govern your rate of sales, such as customer demand, seasonality, and trends in the economy.
Can DSI be used to compare businesses in different industries?
The days sales in inventory figure is typically not a useful way to compare businesses in different industries. DSI can vary widely between different industries: For example, if your company sells high-end jewelry, you’ll probably see much slower sales rates (and therefore higher DSI figures) than a business selling t-shirts.
What challenges are associated with managing DSI?
Managing your DSI can be challenging since it can be subject to external factors like seasonality and economic trends. Investing in a powerful forecasting tool can help you control your inventory size in relation to your rate of sales.
How does a company’s days sales in inventory relate to its cash flow?
A low DSI is an indicator of a healthy cash flow, while a high DSI can indicate slow cash flow. DSI is one variable that financial analysts use to evaluate a company’s cash conversion cycle (CCC), along with days sales outstanding (DSO, or the average time it takes to receive cash for accounts receivable) and days payables outstanding.