Last Updated May 27, 2025
Inventory management is crucial for any business that sells physical products. While traditional inventory tracking can help, monitoring inventory metrics is also key. That’s where days inventory outstanding (DIO) comes in.
This key performance metric reveals how long it takes, on average, for your business to turn inventory into sales. DIO is more than just a number; it’s a window into your company’s cash flow, efficiency, and overall financial health.
With this in mind, continue reading to learn more about what days inventory outstanding is, the DIO formula and how to calculate it, and specific strategies to improve your DIO over time.
What Is Days Inventory Outstanding?
Days inventory outstanding (DIO) is a financial metric that measures the average number of days a company takes to sell its entire inventory during a specific period. In other words, it helps you understand how efficiently your business manages its inventory.
Also known as “days inventory held,” DIO gives business owners a better understanding of how long products sit on the shelf before a customer buys them. A lower DIO often signals that inventory is turning over quickly, which is typically a good sign of strong sales. A higher DIO might suggest excess stock or slow-moving products.
Manufacturers, retailers, and small businesses use DIO to manage supply chains more effectively. Consistently tracking days inventory outstanding offers valuable insights into cash flow and operational efficiency.
Why Is Days Inventory Outstanding Important for Businesses?
In short, days outstanding inventory is a powerful performance metric that can help optimize efficiency and improve decision-making. Here are a few key reasons why it matters:
- Improve cash flow: Tracking DIO over time will help you boost performance and improve cash flow. A lower DIO ratio means your inventory sells faster, allowing you to reinvest cash into the business.
- Make smarter purchasing decisions: Knowing your average days inventory outstanding helps you avoid over-ordering and reduce the risk of unsold stock. Properly categorizing inventory on the balance sheet will also help you understand which inventory moves quickly and which sits on the shelves too long.
- Decrease costs: The fewer days you hold inventory, the less you spend on storage, insurance, and depreciation.
- Streamline inventory management: Tracking days inventory held gives you a clearer picture of demand trends and turnover rates. Plus, regular tracking can help you benchmark performance against industry standards and identify areas for improvement.
How to Calculate Days Inventory Outstanding
Understanding how to calculate days inventory outstanding is essential for evaluating how efficiently your business manages its stock. Use this formula to calculate DIO:
Days Inventory Outstanding (DIO) = (Average Inventory / Cost of Goods Sold) × Number of Days
Let’s break that down:
Average Inventory is typically calculated by adding the beginning and ending inventory for a period and dividing by two.
Cost of Goods Sold (COGS) is the total cost of producing or purchasing the goods sold during that same period.
The number of days is usually 365 for a full year, but you can adjust it for quarterly or monthly calculations.
While understanding how to calculate DIO is a best practice in business accounting, you can also use a built-in days inventory outstanding calculator in your accounting software to streamline the entire process.
Example of Finding DIO
In this DIO example, let’s say you’re starting a trucking company. You want to improve inventory turnover for essential parts, like tires, filters, and engine components for a fleet of trucks.
Over the past year, the company had a:
- Beginning inventory of $500,000 worth of parts
- Ending inventory of $300,000
- Cost of goods sold (COGS) for the year at $2,400,000
We can use this information to manually calculate DIO:
- Average Inventory = ($500,000 + $300,000) / 2 = $400,000
- DIO Formula = ($400,000 / $2,400,000) × 365
- DIO = 0.1667 × 365 = 61 days
That means, on average, it takes about two months for the company to use or sell its inventory. This metric helps you understand if you’re overstocking parts or if there’s room to boost efficiency, both of which can improve cash flow for a trucking company.
What Is a Good Days Inventory Outstanding?
Standard DIO varies by industry. For example, auto dealers have an average DIO of around 60 days, while grocers try to keep this number much lower to prevent spoilage. Seasonal trends and business models also have an impact on DIO. For example, a trucking business that stocks critical repair parts might naturally carry a higher DIO ratio than a fast-turnover retail business, but that doesn’t necessarily indicate poor performance.
Generally speaking, a lower DIO is usually better. That means your company turns over inventory quickly, which frees up cash. However, if the DIO is too low, that can be risky because it means you might be at risk of understocking. Still, a high DIO means you have a lot of unsold inventory, which comes with the cost of storage and, in some cases, depreciation.
Ultimately, the best way to evaluate your number is by comparing it to your industry average. If you’re consistently above or below that range, it’s time to review your supply chain, purchasing, or working capital cycle.
How to Interpret Your DIO
Once you’ve calculated your days inventory outstanding, the next step is understanding what this common accounts receivable metric actually tells you.
Here’s what your DIO might be saying:
High DIO (e.g., 90+ days): You may be holding onto inventory too long, which can cause working capital changes that tie up funds in unsold inventory. This metric could mean overstocking, slower sales, or inefficient inventory management. In industries like trucking or manufacturing, a high DIO ratio might indicate you’re spending too much on storage or buying obsolete parts.
Low DIO (e.g., under 30 days): You’re turning inventory quickly, which often means healthier cash flow. But don’t celebrate too early—a DIO that’s too low could suggest you’re understocked and at risk of supply disruptions.
Fluctuating DIO: Inconsistent numbers can indicate volatile sales, forecasting issues, or seasonal cycles. Monitoring your average DIO over time helps smooth out these variations and tells a more accurate story of your operational health.
By tracking and calculating DIO regularly, you’ll gain insight into how your inventory practices affect working capital and long-term growth.
How to Improve Your DIO
You don’t need to completely overhaul your business to improve days inventory outstanding: a few strategic changes can make all the difference. Follow these tips to lower your average days inventory outstanding to boost cash flow and performance.
Conduct Regular Inventory Audits
The quality of your inventory can have a tremendous impact on days inventory outstanding. Frequent inventory checks help identify obsolete or slow-moving stock. Removing these items from circulation ensures more accurate DIO calculations and improves your real-time visibility. It may hurt at first to remove inventory you’ve already paid for, but in many cases, sunsetting products can reduce storage costs and help you get out of the red.
Use Inventory Management Technology
Manual inventory management can introduce errors and time-consuming processes into your business. Instead, implement a digitized inventory management solution to manage everything from inventory to invoices to sales. Inventory management systems or a days inventory outstanding calculator can automate tracking and spot trends faster than human workers. These tools help you calculate DIO quickly and make proactive adjustments that improve cash flow management in the long run.
Streamline Your Supply Chain
Timing affects everything from storage costs to operating working capital. Work with reliable suppliers and revisit your lead times to optimize DIO. The more agile your supply chain, the faster you can adjust inventory levels, leading to healthier days inventory outstanding metrics.
Monitor Inventory Metrics
Don’t just calculate your days inventory outstanding once a year. Track it monthly or quarterly. That way, you can spot red flags early and maintain an optimized inventory turnover cycle. While you can calculate it manually, tracking DIO in your accounting or inventory management software is generally easier. These tools can also pinpoint trends and suggest improvements to course-correct before you experience cash flow issues.
Consider Financing Options
If you’re trying to improve your DIO, you might experience cash flow gaps in the meantime. Instead of turning down business opportunities, consider temporary financing to bridge the gap. Inventory financing is a popular option, but only if there’s consistent demand for your inventory.
Invoice factoring is a flexible, debt-free option that can improve liquidity by selling your invoices to a provider like altLINE in exchange for fast cash.
In-Summary: What Is Days Inventory Outstanding?
Days inventory outstanding is a simple but powerful metric that tells you how many days inventory sits before it’s sold. Spot inefficiencies by learning how to calculate days inventory outstanding using the standard DIO formula and interpreting your results with industry benchmarks. Whether you’re using a days inventory outstanding calculator or tracking it manually, this metric is essential for maximizing the value of your inventory.
Many small businesses fail because of improper cash flow and poor inventory management. While monitoring DIO is a great first step, you must work to improve it over time with supply chain optimization, technology, and regular audits. Stopgap solutions like invoice factoring are also a savvy way to get the funding you need without the debt.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
