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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
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      • Italy
      • Spain
      • Holland
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      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
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      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
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      • How are UK Factoring Firms Regulated?
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      • Credit Suisse Bailout
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Home Invoice Finance

What is Days Inventory Outstanding?

John Goodden by John Goodden
February 13, 2023
in Invoice Finance
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Download file | Play in new window | Duration: 4:41 | Recorded on September 4, 2022

Days Inventory Outstanding (DIO) is a financial metric concerned primarily with working capital. It measures the average number of days that a company holds inventory prior to a sale. Thus, the lower the number, the fewer days that it takes to sell inventory. Days Inventory Outstanding (DIO) is also known as Days Sales of Inventory (DSI) and Days In Inventory (DII).

How is Days Inventory Outstanding Calculated?

DIO = average inventory / cost of goods sold x number of days

(/ = divided by, x = multiplied by )

Where average inventory is the money value of the entire inventory that can be taken from either the end of a reporting period, or it can be an average value for the period under scrutiny (in this case 1 year).

Where the cost of goods sold is the price to make the inventory items. Costs in this category include the price of raw materials, wages and utility bills.

Where the number of days is  the time frame under consideration. This is often 365 days or 90 days (one quarter).

Therefore, if a company has an average inventory over a year of £50,000, and the cost to manufacture the inventory is £190,000. The DIO is calculated as:

50,000 / 190,000 x 365 = 96 Days

What is a Good DIO Number?

In the above example, it takes on average 96 days for inventory to be sold. This might seem poor. It depends: if your company only needs to sell a few items a year to be profitable, then 96 days as DIO might indicate financial health for the company.

In other words, to understand whether your company is holding too much stock for too long it is necessary to compare with other companies in the same sector.

High DIO

If in comparison to other companies in your sector, your DIO is high this indicates cash is being tied up in inventory for too long. This affects workflow capital. Reasons could be overstocking or poor sales. The danger of holding inventory for long periods is that the market could move on, leaving certain inventory items obsolete, non-compliant or out-dated. 

Low DIO

Again, if a company DIO is low compared to that of other companies in the same sector, it indicates a company is performing well. Money is not being held captive; it is money that is quickly being released to working capital where it can be put to work.

However, a single digit DIO might indicate a structural weakness in a company. If on average inventory is held for less than 10 days then a sudden surge in demand might catch the company unaware and unable to fulfil orders on time.

That is why it is important to look at how DIO changes over time and to correlate the figures with the larger context of other economic factors such as economic upturns/downturns and changes in technology.

How to Improve Inventory Management

Days Inventory Outstanding can be reduced by the following methods:

  • Better marketing to sell inventory quicker
  • Better planning and forecasting to predict sales more accurately and match that with planned production
  • Optimising stock levels so that a company never holds more inventory of raw materials and components than necessary. This method has been effectively used in the automobile industry using ‘just-in-time’ supply chains.
  • Remove obsolete or slow-selling inventory by offering discount prices or other buying incentives such as free shipping

The Cash Conversion Cycle

Days Inventory Outstanding is an important metric in itself. However, it is also used to calculate a number for the cash conversion cycle. The formula for this is:

Cash conversion cycle = Days Inventory Outstanding  (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO).

The cash conversion cycle formula produces a number for days that shows how quickly money is being spent on raw materials etc., being turned into inventory, being sold and then reappearing as cash available. The faster money is being used to make inventory and then being realised in sales, the better it is for a company.

In Summary

Days Inventory Outstanding is a very useful metric for measuring the financial health of a company. The number needs to be put into the context of how other firms in the same sector are faring in terms of DIO.

If a company decides it is holding inventory for too long there are a number of actions available to reduce DIO.

And finally, DIO is a key component for calculating the value of the cash conversion cycle.

Tags: cash conversion cycleDays in InventoryDays Inventory OutstandingDays Sales of InventoryDIIDIODPODSIDSO
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
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      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
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      • The Roles of Deal Arrangers and Book Runners in Securitization
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      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
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      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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      • The Current State of the UK Economy
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      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
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      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
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