What is days inventory outstanding?
The average number of days inventory sits before it sells. You will see it abbreviated as DIO.
Definition
Days inventory outstanding is how long, on average, stock sits on the shelf before it is sold. On the books, it is a timing reading of the inventory balance against cost of goods sold, not a ledger account.
A shop uses it to see how long cash is sitting in stock. A higher figure means stock is lingering; a lower figure means the shelf is turning faster.
It is an average across everything on hand, not the age of any one item. A slow-moving line can pull the average up even when daily sellers move well.
Stay with days on hand on this page. A longer average means cash is sitting in stock longer.
Where it shows up
Balance sheet: Related to inventory.
P&L: Related to cost of goods sold.
Cash flow: Related to cash sitting on the shelf until it sells.
See also: Inventory · Inventory Turnover · Cash Conversion Cycle
When you look at the Balance Sheet, this reading starts from the inventory total. You will not find a line labeled with these days.
The Income Statement supplies cost of goods sold for the period. That cost is the denominator, because it is the inventory that actually left with customers.
On the Statement of Cash Flows, a rising figure often pairs with inventory using cash. Changes in working capital will show that drag even when leftover profit looks fine.
A physical count is the check behind the book total. This page turns that total into days so you can watch how long cash stays on the shelf.
When the figure is high, cash is sitting in unsold goods. When it is low, the shop is selling through before the next delivery arrives.
How it works
Take the inventory balance. Divide it by average cost of goods sold per day for the same period.
How days inventory outstanding usually works:
- Take the inventory balance
- Divide cost of goods sold by the days in the period to get average cost per day
- Divide inventory by that average daily cost
- Use cost of goods sold, not sales at retail
- Recompute after the period closes with the new inventory total
Average cost per day is cost of goods sold divided by the number of days in the period. A 30-day month with $18,000 of cost of goods sold is $600 a day.
The result is how many days of cost are still sitting on the shelf. It is an average, not a promise that every item sells on that day.
Use cost of goods sold, not sales, in the denominator. Sales include markup, which would make days on hand look shorter than they are.
Stay with this one lag when you read it. Receivable days and payable days are other legs, and they are not this page.
The figure goes up when you buy more than you sell, or when leftover stock sits after a rush. It goes down when goods go out faster than new boxes arrive.
Match the period to the balance you are reading. A year of cost against month-end inventory will understate the days on hand.
After the month closes, recompute with the new inventory total and that month's cost of goods sold. Last month's 20 days is history.
Example
Stem & Stone Florist has $12,000 of inventory in the coolers. Cost of goods sold for the 30-day month was $18,000.
Average cost per day is $18,000 divided by 30, which is $600. Divide $12,000 by $600, and days inventory outstanding is 20.
Those 20 days are how long, on average, cash sits in stems and vases before a sale. The florist is funding a bit under three weeks of stock with its own cash.
If the same month's inventory had been $6,000, the figure would have been 10 days. The coolers would have been turning twice as fast.
A wedding leftover of $3,000 that sits into the next week will pull the average up even if daily bunches sell through. Obsolete inventory that never sells keeps the figure high until it is written down.
If next month's cost of goods sold stays $18,000 and inventory falls to $9,000, the figure drops to 15 days. Cash came off the shelf faster without a change in the prices on the tickets.
Safety stock and a reorder point explain why some days on hand are planned. This page still reports the average, including that buffer.
Common mix-ups
Days inventory outstanding is not the inventory balance. The balance is a dollar total; this page is how many days that total represents.
Days inventory outstanding is not inventory turnover. Turnover is how many times stock is replaced in a period; this page is the days those turns imply.
Days inventory outstanding is not the cash conversion cycle. The cycle nets inventory, receivable, and payable days; this page stays on days on hand only.
Related terms
- Inventory: Goods held for sale or used to produce goods for sale.
- Inventory Turnover: How many times inventory is sold and replaced in a period.
- Cash Conversion Cycle: The number of days between paying for inputs and collecting from customers.
- Cost Of Goods Sold: The direct cost of the products sold during the period.
- Obsolete Inventory: Stock that no longer sells and is unlikely to move at normal prices.
- Safety Stock: Extra inventory held as a buffer against demand or supply swings.
- Reorder Point: The stock level that triggers a new purchase order.
- Finished Goods Inventory: Completed products ready to sell to customers.