What is days inventory outstanding?


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 Too much-unused inventory can be bad for a business since it might become outdated and unsellable over time.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

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Pieter Borremans
By Pieter Borremans

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