Days inventory outstanding

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  Days inventory outstanding, or, DIO, as it is often referred to, is a ratio that measures the average number of days that a company holds inventory before they transform that inventory into sales.  The lower the figure, the better.

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  Lower DIO tells us that this inventory will tie up our cash for less time and that our risk of obsolete inventory is much less. Days inventory outstanding is also known as days sales of inventory and days in inventory.
   Days inventory outstanding is one component of the cash conversion cycle or cash-to-cash cycle time.  The cash conversion cycle is calculated using three metrics, they are: Days inventory outstanding, Days payable outstanding and Days sales outstanding.  Why is this important?  It tells us that The cash-to-cash cycle time can be improved by:

1. Reducing Days Inventory Outstanding.
2. Reducing Days Sales Outstanding.
   
3. Increasing Days Payables Outstanding.

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Example

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What does a high/low DIO mean?

• When a company has a low DIO, it typically means they are converting inventory into sales rapidly. This is a good thing. Another way to interpret low DIO is that there is less chance that inventory will become obsolete.  In general a lower DIO is better than a higher one.  High DIO generally indicates that a company is not converting inventory into sales fast enough.  This could also reveal inventory management issues such as overstocking. If DIO is high, the company’s cash is also tied up in inventory for a longer period of time,which also means that the company can not use its money for other purposes.

How do you improve your high DIO?

• The first is to speed up the conversion of inventory into sales.
• Reduce the amount of inventory that you are holding.  This may involve using techniques like the just in time system or implementing continuous improvement strategies like lean which generally have a positive effect on inventory management.
  
• Many organizations will also honed in on sales techniques like various marketing strategies and using different methods that influence customer sales.

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