If after calculating your days inventory outstanding, you see a need for improvement, there are ways to improve your days inventory outstanding results. CCC results can be used to compare current performance against other similar companies. Potential investors and creditors also use Cash Conversion Cycle results to analyze the efficiency of business operations.

On the other hand, a high value of days inventory outstanding number suggests that the business may be having trouble managing its high-volume, outmoded inventory and may have overspent on it. Using a step function, the projected COGS incurred by the company is as follows. Based on the recent downward trend from 40 days to 35 days, the company seems to be moving in the right direction in terms of becoming more efficient at clearing out its inventory quickly. However, if your DIO indicates that a business only turns over inventory twice a year, profitability will be directly affected, with fewer sales and less revenue. For example, if your business is negotiating a large order from one of your best customers, you’ll likely order excess inventory to complete the order.

If there’s miscounted inventory, damaged or lost inventory, or theft, then that will skew the DIO lower but with an asterisk attached to the number. For example, if you get a great deal on a bulk purchase order and bring in a ton of inventory at once, that will skew your DIO higher but can also provide a favorable gross margin ratio. Furthermore, the company’s COGS are expected to grow each year at a constant 5% growth rate year-over-year (YoY).

1. Likewise, if the standard DIO is 50 and your company’s DIO is 65, then your DIO would be considered high.
2. Because Days Inventory Outstanding measures the number of days it takes to convert inventory into sales, it is one of the three metrics used when calculating the Cash Conversion Cycle (CCC).
3. The projection of the cost of goods sold (COGS) line item finished, so the next step is to repeat a similar process for our forward-looking inventory days assumptions that’ll drive the forecast.
4. Additionally, a brief holding time reduces the likelihood that inventory will become outdated, lowering the possibility that the inventory asset would need to be written off as a whole.
5. Mathematically, the number of days in the corresponding period is calculated using 365 for a year and 90 for a quarter.

Therefore, the company requires roughly ~73 days to clear out its inventory, on average. Since Walmart is a retailer, it does not have any raw material, works in progress, and progress payments. However, this number should be looked upon cautiously as it often lacks context. DSI tends to vary greatly among industries depending on various factors like product type and business model. Therefore, it is important to compare the value among the same sector peer companies.

Days inventory outstanding example

The manager may then arrange a meeting with the sales and marketing staff to discuss ways to boost the company’s sales. For example, let’s say company A has a DIO of 67 days, and company B has a DIO of 58 days. This means that Company B sold all its stock in the inventory in 58 days, which is faster than Company A, with 67 days.

What is Days Inventory Outstanding – Formula & Interpretation

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. You can quickly evaluate which companies are performing well in comparison to other companies by calculating the DIO of each. Additionally, a brief holding time reduces the likelihood that inventory will become outdated, lowering the possibility that the inventory asset would need to be written off as a whole.

What does a high or low days inventory outstanding signify?

It’s important to note that the DIO formula only works if you use consistent accounting methods and period lengths. For example, if you’re measuring DIO for a month, you need to make sure that both your ending inventory and cost of goods sold numbers are for that same month. There’s the metric “as of” a particular date, such as the end of the fiscal year, where the average inventory value is equal to the final inventory value as of the end date. So a high DIO means your resources are sitting dormant in inventory that’s not selling. If you have a high DIO measure, then your sales could be lagging, or you could be buying too much inventory at once. However, the projected inventory balances are equivalent under both approaches, as confirmed by our completed model.

In the next step, we will carry forward the inventory turnover assumption of 5.0x and the DIO assumption of 73 days to project future inventory levels. Next, the company’s days inventory outstanding (DIO) can be calculated by dividing the $20mm in inventory by the $100mm in COGS and multiplying that by 365 days – which results in 73 days. Note that the average between the beginning and ending inventory balance can be used for both the calculation of inventory turnover and DIO. For purposes of forecasting, inventory is ordinarily projected based on either inventory turnover or days inventory outstanding (DIO). Conversely, a different method to calculate DIO is to divide 365 days by the inventory turnover ratio. Hence, an increase in working capital – i.e. current operating assets minus current operating liabilities – causes a reduction in the free cash flow (FCF) of a company..