Days inventory outstanding (DIO) calculator allows you to quickly compute inventory turnover. So, with this useful tool, you will be able to estimate the time needed to convert inventory to sales. This metric can be very helpful for those looking to analyze a company’s effectiveness. It can tell you whether your business is effective or not.
In this article, we will provide some explanations of days inventory outstanding (DIO). You can learn how it is calculated using the DIO formula and our calculator. We will also provide some examples of days inventory outstanding for better understanding. But, first of all, let’s check the DIO definition to help you get a better idea of days inventory outstanding. It’s worth reading!
Days Inventory Outstanding: What Is It?
Days inventory outstanding is a measure that tells us how quickly the inventory of an enterprise can be turned into sales. It shows how long (on average) it takes for the companies to sell their inventory to clients or consumers.
In other words, days inventory outstanding is a measure of the average time that a company has its products in the supply chain. It indicates the number of days that a company has an outstanding balance on its accounts receivable. It is usually calculated by dividing the total inventory on hand by the number of days in a year or by dividing the total amount of money owed to the company by the total amount of money they have received.
So, it is all about inventory turnover. The inventory turnover ratio is a measure of the number of times per year that the inventory turns over. The higher the ratio, the more often a company will have to place an order to replenish its stock. A company with an inventory turnover ratio of 1.0 turns its entire inventory over once per year.
Why Is It Important?
Therefore, days inventory outstanding (DIO) can help identify the financial and operational efficiency of a company. There are many ways to improve business efficiency. One of the best ways to do this is by implementing AI assistants. AI assistants can help with tasks such as scheduling, data entry, and more. As a result, the inventory can be turned into sales in less time.
Scheduling is a very time-consuming task for an individual who has many different responsibilities. By implementing AI assistants into the company, employees will be able to focus on their primary tasks and not have to worry about scheduling meetings or events. Data entry can also be tedious and time-consuming for humans who have long lists of numbers they need to input into a spreadsheet or database. Implementing an AI assistant would make this task much easier because the machine will be able to input all of the data without any mistakes or errors in formatting.
It is also important to note that this activity ratio is widely used for assessing the operations of companies. It’s best to use it along with other metrics like CCC (cash conversion cycle), DPO (days payable outstanding), and DSO (days sales outstanding). When combined together, these metrics can reveal how well businesses turn their raw materials or inventory into cash.
DIO Formula: How to Calculate Days Inventory Outstanding?
If you want to calculate DIO, then you should use the formula below:
DIO = Cost of Average Inventory / Cost of goods sold * 365
As you can see, the formula is not complicated either. Nevertheless, we are going to provide an example of how it works in real life.
- Cost of Average Inventory: $20,000
- Cost of goods sold: $20,000
Let’s say the cost of average inventory and the cost of goods sold are equal – they are $20,000 in our example. Then days inventory outstanding would be as follows:
DIO = $20,000 / $20,000 * 365
DIO = 1 * 365
DIO = 365
This is actually the number of days in a fiscal year. It is easy to calculate. We will take another example and see how DIO can be calculated in 4 steps.
Step 1
First, you need to calculate the average inventory. You will actually have to determine the average inventory using the following formula:
Average inventory = (beginning inventory + ending inventory) / 2
If we assume that the inventory in 2021 was $10,000 and it increased to $30,000 in 2022, then the average inventory is ($10,000 + $30,000) / 2 = $20,000.
Step 2
At this stage, you need to determine the cost of goods sold (COGS). You can find this information in the company’s annual reports. Take a look at the income statement. Let’s say the cost of goods sold is $240,000.
Step 3
The next thing that should be determined is days in the accounting period of the company. It is usually identical to the fiscal year. Considering that the fiscal year has 365 days, you will probably use this number when calculating DIO.
Step 4
Now you can finally calculate DIO. This is the last step to take. Use this simple formula:
DIO = average inventory/cost of goods sold * days in the accounting period
In our example, DIO = ($20,000 / $240,000) * 365 = 30.417 days. We recommend using the DIO calculator to determine days inventory outstanding correctly and quickly.
FAQs
Why Calculate DIO?
As we said before, days inventory outstanding is a measure of the average number of days that products are in the supply chain before being sold. The DIO is a key metric for determining how much money is tied up in inventory and how quickly a company can respond to changes in demand. Therefore, it is important to calculate this metric when analyzing the inventory management efficiency of a company.
How to Interpret DIO?
If the DIO is longer, this would mean that the inventory management system of a company is less efficient, and vice versa. That being said, companies should strive to have short inventory management to increase their business efficiency. However, it’s not good to have a too short DIO because this may result in stock shortages.