What Is Days Inventory Outstanding (DIO)?
Also known as: DIO, Days Sales of Inventory, DSI, Days of Inventory On Hand
Definition
Days inventory outstanding (DIO) is the average number of days inventory sits before being sold, calculated as average inventory divided by cost of goods sold, multiplied by the days in the period. Lower DIO releases cash.
Days Inventory Outstanding (DIO) Explained
DIO = (average inventory / cost of goods sold) x number of days in the period. For a year, use 365. It is the same relationship as inventory turnover expressed in days: 365 divided by turns. If inventory averages 3 million and annual cost of goods sold is 12 million, DIO is 91 days.
DIO is one of the three parts of the cash conversion cycle, along with days sales outstanding (receivables) and days payables outstanding (payables). Cash conversion cycle equals DIO plus DSO minus DPO. Because inventory days are often the largest component for a manufacturer, they are the first place finance looks when working capital is tight.
Data comes from the ERP: inventory balance from the inventory subledger or the balance sheet, and cost of goods sold from the general ledger. Make sure both use the same scope. Including capitalized WIP or excluding consigned and customer-owned material changes the answer. Break DIO out by raw material, work in process and finished goods, since each points to a different lever: purchasing and safety stock for raw, cycle time and lot sizes for WIP, forecast and make-to-order mix for finished goods.
Use averages that respect seasonality, and avoid comparing across businesses with different production strategies. A made-to-order shop and a make-to-stock shop have naturally different DIO. Track the trend and the segment breakdown rather than a single headline number.
Why It Matters
- Each day of DIO has a cash value equal to one day of cost of goods sold, which makes improvement targets concrete.
- It links operations decisions (lot sizes, safety stock, lead times) to working capital and financing cost.
- Splitting DIO by stage shows whether cash is trapped in raw, WIP or finished goods.
- Lenders and buyers use DIO trends as a health signal.
In Practice
Example: annual cost of goods sold is 36.5 million, so one day of COGS is about 100 thousand. Cutting DIO from 80 to 70 days releases around 1 million of cash. If raw material is 40 days of that, a 5 day cut in raw material safety stock gets half the way.
Frequently Asked Questions
What is the DIO formula?
Average inventory divided by cost of goods sold, multiplied by the number of days in the period. For a year, multiply by 365.
How do DIO and inventory turnover relate?
DIO is 365 divided by inventory turns. A company with 4 turns has a DIO of roughly 91 days.
Is a lower DIO always better?
Not always. Very low DIO can mean thin stock and missed orders. Aim for the lowest DIO that still meets your service level and lead time promises.
How does DIO fit into the cash conversion cycle?
Cash conversion cycle equals DIO plus days sales outstanding minus days payables outstanding. DIO measures time cash is tied up in stock.
Related Terms
Inventory Turnover
Inventory turnover is the number of times a company sells and replaces its inventory in a period, calculated as cost of goods sold divided by average inventory value. Higher turns mean less cash tied up in stock.
Safety Stock
Safety stock is buffer inventory carried above expected demand to protect against variability in demand and supply during replenishment lead time. In ERP it is netted out of available inventory so MRP plans replenishment before the buffer is consumed.
WIP (Work in Process)
WIP (Work in Process) is inventory that has been released to production and has begun conversion but is not yet a finished good. It includes partially machined parts, subassemblies, and material sitting in queue between operations.
Lead Time
Lead time is the elapsed time between initiating an order and having the material available for use. In ERP it is the offset MRP applies when back-scheduling a planned order from its due date to its release date.
Obsolete Inventory (Excess and Obsolete Stock)
Obsolete inventory is stock with little or no expected future sales or usage because of design changes, end-of-life products, demand decline, or shelf-life expiry. Excess inventory is stock above forecast need. Together they are called E&O.
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