Days Inventory Outstanding Formula and Example
Calculating Inventory Performance
Days Inventory Outstanding (DIO) is a financial ratio that measures the average number of days it takes to sell an inventory. It indicates how efficiently a company manages its inventory and how quickly it can convert it into cash.
DIO Formula
The formula for DIO is:
DIO = Average Inventory / Cost of Goods Sold (COGS) x Number of Days in Period
Where:
- Average Inventory = (Beginning Inventory + Ending Inventory) / 2
- COGS = Cost of goods sold during the period
- Number of Days in Period = 365 days for a year or the actual number of days in the period
Example Calculation
Suppose a company has the following information for a year:
- Beginning Inventory: $50,000
- Ending Inventory: $75,000
- COGS: $300,000
Calculating the average inventory:
Average Inventory = (50,000 + 75,000) / 2 = $62,500
Calculating the DIO:
DIO = 62,500 / 300,000 x 365 = 73 days
This means that it takes the company an average of 73 days to sell its inventory.
Interpretation
A high DIO indicates that the company is holding on to its inventory for a long time, which can lead to increased storage costs and obsolescence. A low DIO indicates that the company is efficient in managing its inventory and is selling it quickly.
DIO can be compared to industry benchmarks or historical performance to assess its efficiency. It can also be used to identify areas for improvement in inventory management.
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