What Is Days Inventory & How Is It Calculated?

Days Inventory, also known as Days Sales of Inventory (DSI) or Days Inventory Outstanding (DIO), is a financial metric that measures how long it takes a company to sell its average inventory. It helps businesses understand the efficiency of their inventory management and sales processes. By showing how quickly products move from storage to customer, it assesses a company’s operational efficiency and its ability to convert inventory into sales.

Key Figures for Calculation

Calculating Days Inventory requires two primary figures: Cost of Goods Sold (COGS) and Average Inventory. COGS represents the direct costs of producing goods, including direct materials and labor. COGS is used in this calculation instead of sales revenue because inventory is valued at its cost to the company, not its selling price.

Average Inventory is the average value of inventory over a specific period. This is typically calculated by adding the beginning inventory and ending inventory for a period and dividing the sum by two. Using an average helps to smooth out any fluctuations in inventory levels, providing a more representative figure. Both COGS and inventory figures are typically found on a company’s financial statements; COGS is on the income statement, while inventory balances are on the balance sheet.

Calculating Days Inventory

The formula for calculating Days Inventory is straightforward: divide Average Inventory by the Cost of Goods Sold, then multiply the result by the number of days in the period, usually 365 for an annual calculation. This calculation provides a clear measure of inventory turnover efficiency.

For example, if a company has an Average Inventory of $100,000 and its Cost of Goods Sold for the year is $500,000, the calculation would be: ($100,000 / $500,000) 365 days. This results in a Days Inventory figure of 73 days, meaning, on average, the company holds its inventory for 73 days before selling it.

Interpreting the Days Inventory Figure

The Days Inventory figure provides insight into a company’s inventory management and sales performance. A low Days Inventory indicates efficient inventory management, suggesting a company quickly turns its inventory into sales. This can also imply high product demand and efficient operations, supporting cash flow by reducing capital tied up in unsold goods.

Conversely, a high Days Inventory figure suggests issues such as overstocking, slow sales, or potentially obsolete inventory. While a lower number is preferred, an extremely low Days Inventory could signal insufficient stock to meet customer demand, potentially leading to lost sales. There is no single ideal Days Inventory number; it varies significantly by industry. For instance, industries with perishable goods like food often have very low Days Inventory, while those dealing with high-value, slow-moving items like luxury goods or heavy machinery might have a much higher figure.

Influences on Days Inventory

Many factors, both internal and external, can influence a company’s Days Inventory figure. Internal factors relate to a company’s operational choices and efficiencies. These include production schedules, which determine the rate at which goods are manufactured, and purchasing practices, which dictate the quantity and frequency of inventory acquisition. The accuracy of sales forecasting also plays a role, as precise predictions help align inventory levels with anticipated demand.

External factors are conditions outside a company’s direct control that can impact inventory movement. Consumer demand fluctuations, driven by economic conditions or changing preferences, directly affect how quickly products sell. Seasonality, where demand peaks during certain times of the year, can also cause Days Inventory to fluctuate. Additionally, broader supply chain disruptions, such as delays in receiving materials or shipping finished goods, can extend the time inventory is held.