The number of days for inventory to generate into sales is known as inventory day or inventory days outstanding. The average inventory days outstanding differ from business to business, but a lower DIO is highly desirable because it shows better inventory management.
The computation of days inventory outstanding indicates how fast a business can convert inventory into cash. It is a liquidity measurement as well as an indicator of a firm’s financial and operational performance. The following is the formula for days inventory outstanding:
A firm with a low days inventory outstanding can convert its inventory into sales more quickly. As a result, a low DIO implies a company that is efficient in terms of managing its inventory and sales performance. On the other hand, a business with a high day inventory outstanding shows that it was unable to convert its inventory into sales quickly.
This could be a result of weak sales or an excess of inventory purchased. Too much-unused inventory can be bad for a business since it might become outdated and unsellable over time. Excess inventory has a detrimental influence on cash flow as well.
Importance of Days Inventory Outstanding:
· It indicates how long a company’s inventory supply normally lasts
· It shows the inventory’s liquidity
· It determines the time it takes to turn existing inventory into cash or sales
