Inventory Days Formula, Days Sales In Inventory (DSI)
LAST UPDATE: MAY 30 , 2022
Efficient inventory management rely on different aspects to ensure business’s flourishing.
Additionally, evaluating your supply chain performance can give you a look in-depth at your business.
There are multiple indicators used to assess the supply chain performance, one of the best indicators is DIO, it reflects the efficiency of the company at managing its inventory and how it can improve stocks management by making better decisions about it.
What Is Days Sales In Inventory (DSI)?
Inventory days formula, or Days Sales In Inventory (DSI), also known as Days Inventory Outstanding (DIO) – there are many acronyms that refer to inventory days – is the number of days that a company takes to turn its inventory into sales.
It is one of the most important metrics that determine the company’s ability to quickly sell its goods. It varies from industry to industry, but it reflects how effective your inventory management is.
If the number is high, it points to inventory management problems or inefficient sales strategy that you should rethink on how to promote it.
See also Inventory Management KPIs to Improve Business Operations
On the other hand, the lower the number, the more effective the management as it indicates the quick selling of inventory. That means lower inventory storing costs and less time.
Inventory Days Formula
Inventory days formula:
Inventory Days = ( Average Inventory / COGS ) x Number of Days.
How To Calculate Days In Inventory
To calculate days in inventory, you need to calculate these things:
– Average inventory: Average inventory is the units of inventory a company typically holds.
– Period length: Generally, it refers to the amount of time a company want to calculate the DSI for. It is often one year (365 days).
– COGS: The Cost of goods sold in a company’s inventory.
Here are five steps to calculate days in inventory:
1- Calculate The Average Inventory
Add the beginning inventory and ending inventory together, then divide by two.
For example, if a company begins the year with $10,000 of inventory and ends the year with $4,000 of inventory, the average inventory for the company is $ 7,000.
Average Inventory = (Beginning Inventory + Ending Inventory) /2.
2- Calculate The Cost Of Goods Sold
To find the cost of goods sold, add the value of beginning inventory to the cost of goods, this includes any cost the company pays to manufacture or get its goods such as cost of materials, labor, purchases, and so on. Then, subtract the value of ending inventory of the period you’re measuring.
In the example with the company we mentioned above, if the company has a cost of purchases of $6,000, the calculation can be ($10,000 + $6,000) – $4,000. As a result, the cost of goods sold is $12,000.
COGS = Beginning Inventory + purchase – Ending Inventory.
3- Determine The Period Length
Determine the length of the period you want to calculate the DSI for. make sure to represent the period length as a number of days.
If you want to consider a period of one month, June, for example, then the period length would be 30 days.
The period length in our example is one year, so it is represented as 365.
4- Divide The Average Inventory By The Cost Of Goods Sold
5- Multiply The Results By The Determined Period Length
As soon as you divide the average inventory by the cost of goods sold, take the result and multiply it by the number of days in the period you have chosen before.
In our example, the calculation well be this way, the average inventory is 7,000, it is divided by the cost of goods sold which is $12,000, multiplied by 365, the result is 212.9 days.
This means that the company takes 212.9 days for its inventory to turn into sales.
If you still think it is difficult and for more detailed information on the formulas, walk through it step-by-step in the link below.
What Inventory Days Formula Can Tell You
Determining whether the DSI of your business is high or low depends on the model of your business, the average for your industry, the types of your products which you sell, etc.
Inventory days formula represents the number of days each product or SKU is in your warehouse. it is useful for companies as it helps to take view on holding and storage costs, it also helps to identify the potential problems and drawbacks in inventory and sales management. The less time your products stays as inventory, the lower the cost of storage, and vice versa.
see also What are the inventory costs
It measures liquidity, value, and cash flows; therefore, it is an important indicator for investors and retailers.
It is the most basic financial ratio for businesses that shows you the number of times inventory has been sold and replaced in a given time period.
This ratio tells you how fast and efficiently a company is making sales from its inventory.
If the turnover is low, it indicates the company has either weak sales or excess inventory. On the contrary, the high rate shows that the company has strong sales and there’s a market demand for their product.
Inventory turnover can help businesses make right decisions on pricing, marketing, manufacturing, and purchasing new inventory.
DSI (Days Sales Of Inventory) Vs. Inventory Turnover
While Inventory turnover measures how fast a company can sell (turn over) its inventory or replace it, (DSI) the days of inventory tells how much time a company can turn its inventory into sales.
Indeed, DSI is the number of days a company takes to turn inventory into sales, on the other hand, inventory turnover is number of times inventory is sold or used.
Essentially, DSI is the inverse of inventory turnover for the same given period.
These formulas can clarify the relation between DSI and inventory turnover:
DSI= (Average inventory /COGS) Ã—365 days
Inventory turnover= (COGS /Average inventory)
DSI= (1/inventory turnover) Ã—365 days
Example Of Days Inventory Outstanding
Let’s have an example to see how to calculate DIO:
Suppose a company has a beginning inventory of $7,000, in a 12 month period, $18,000 in purchases, and $3,000 in ending inventory.
First, calculate the average of inventory:
Average Inventory= ($7,000 + $3,000)/2=$5,000
Second, calculate the cost of goods sold:
COGS=$7,000 + $18,000 – $3,000 = $22,000
Here, DIO would be:
(5,000 / 22,000) x 365 = 82.9 days
Why The DSI Is Important
There are many benefits that make days inventory outstanding important:
- Increase overall cash flow:
Once the DIO indicator is low, that means the company is moving its inventory into cash faster. The company’s cash flow will be better.
Along the same line, more liquid inventory means the company’s cash flow will be better.
- Inventory management Optimization:
As inventory levels management is vital for most businesses. Consequently, DIO is one of the best indicators that identify the efficiency of the company at managing its inventory and turning it into sales.
- Reduce the risk of inventory spoilage:
Keeping DIO low is an important factor in a company’s management of its inventory, especially in the existence of perishable stock. The company’s costs in storing, maintaining, and preserving it from spoilage and loss are affected by DIO.
- Take timely marketing and pricing measures:
If your DIO indicator is high, it means that you have to change your sales strategy such as by introducing discounts on items that give incentives to encourage customers to buy more.
- Plan for the future:
The DIO indicator rises and falls throughout the year due to seasonal sales. Therefore, it allows you to understand how to create accurate inventory forecasts to improve your business’s future.
The only case that a high DSI value is preferred is when there are demands for a particular product in a particular period which depends on market dynamics, in this case, businesses hold inventory in order to sell it later for much higher price, which, in turn, enhances profits over the long term.
In a business complex world, if you are seeking growth in your business, then you have to implement a complex approach to your inventory management. Moreover, there are many indicators that should be used and the DIO is not the only one. Implement our system to see those indicators.