Days inventory outstanding (DIO)

The formula

• DIO = d · L / COGS

L is the inventory, COGS the cost of goods sold during the period and d the days in it. Inventory over cost of goods sold is the share of a period’s sales that is still sitting in stock; times the period’s length, it is days.

A worked example

Inventory of 120,000 and a year’s cost of goods sold of 876,000: DIO = 365 · 120,000 / 876,000 = 50 days. What is on the shelf today will take about fifty days to sell. Turned round, a company that sells 876,000 at cost a year and wants to hold 30 days of stock keeps about 72,000 in inventory.

The same thing as inventory turnover

Inventory turnover is COGS / L, how many times a year the stock is sold and replaced; DIO is d divided by it. A turnover of 7.3 a year is a DIO of 50 days. One is a multiple, the other a count of days, and the days are easier to set against a delivery time or a season.

Its place in the cash cycle

DIO + DSO − DPO is the cash conversion cycle. Stock is the first stop for the company’s cash: it goes out to the supplier, waits in the warehouse for DIO days, waits with the customer for DSO days, and comes back.

Common mistakes

• Dividing by sales instead of cost of goods sold. Stock is carried at cost; revenue is at the selling price, and the mix gives a DIO that is too short.
• Using the closing stock for a seasonal business. An average of the period’s balances says more.
• Mixing periods. 365 days go with a year’s cost of goods sold, 90 with a quarter’s.

Frequently asked questions