Average Days Inventory Outstanding Ratio Definition, Formula, Examples

This means that you can strategically allocate your inventory to ensure that each geographical location has optimally high inventory levels. This helps prevent stock from accumulating or going obsolete, which in turn lowers DSI. Good DSI generally means a decent number of days a business can sustain its inventory. It is calculated to effectively manage inventories and find a balance between having enough stock reserve but not too much to lay idle.

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It also aids in identifying slow-moving goods that may need promotional efforts to increase their inventory ratio. The first step in calculating DSI ratio is to determine the average inventory level during the period for which you want to calculate the ratio. This is typically done by taking the sum of the beginning and ending inventory levels and dividing by two. Small businesses benefit significantly from tracking DSI, gaining clearer insights into inventory efficiency, improving cash flow, and making smarter purchasing decisions. Toyota famously leverages just-in-time inventory management, significantly reducing lead times, minimizing warehouse costs, and improving its cash flow.

Step 2: Apply the DSI Formula

By understanding and effectively managing DSI, supply chain and logistics professionals can enhance operational efficiency and make informed decisions that bolster their organization’s financial performance. As technology continues to advance and sustainability becomes a priority, the strategic importance of DSI will only grow, making it an essential tool for future-ready businesses. Days Sales in Inventory (DSI) is a pivotal metric for supply chain and logistics professionals, providing a window into the efficiency of inventory management and its direct impact on cash flow. Understanding DSI is crucial for optimizing warehouse operations and enhancing financial performance. In this blog post, we will delve into the intricacies of DSI, exploring its calculation, significance, and strategic role in inventory management. By the end, you’ll have a comprehensive understanding of how to leverage DSI to drive operational efficiency and financial success.

Lower inventories quickly convert stock into cash, bringing down the DSI. Average Days Inventory Outstanding ratios can vary significantly across industries. ❌ Using the selling price instead of the cost price skews the calculation. Different industries have different benchmarks—fast-moving consumer goods (FMCG) have high turnover, whereas heavy machinery has lower turnover. A company has a beginning inventory of ₹500,000 and an ending inventory of ₹300,000 for the fiscal year.

But the COGS value could also be obtained from the annual financial statement. Keep in mind that it’s important to include the total of all categories of inventory. On top of all of this, one of the biggest factors of importance is that the longer a company keeps inventory, the longer it won’t have access to its cash equivalent. Therefore, the company wouldn’t be able to use these funds for other operations and opportunities.

Examples of Average Days Inventory Outstanding Ratio Calculation

• It is important to stay on top of your order management and current inventory to ensure costs are being optimized.
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• Inventory forms a significant chunk of the operational capital requirements for a business.
• A low DSI value generally means that a company is balancing sales with inventory well.
• A retail corporation, such as an apparel company, is a good example of a company that uses the sales of inventory ratio to determine the cost of inventory.

Here are answers to the most common questions about days in sales inventory. From real-time inventory counts to daily inventory histories, ShipBob’s analytics dashboard offers you critical metrics at a glance, as well as detailed inventory reports for downloading. Sometimes, it might seem like inventory is flying off your shelves; other times, it might feel like it takes weeks for the last piece of inventory to finally get sold.

The ratio is calculated by dividing the average inventory by the cost of goods sold and then multiplying the result by the number of days in the period being measured. Organizations that take fewer days to sell the inventory show that the organization is more proficient at selling its stock. The DSI figure also helps in determining the overall performance of the company. DSI trends can be indicators of whether a company is improving its sales or falling behind. An increase in DSI typically signals slower sales, excess inventory, declining demand, or inefficiencies in inventory management.

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For example, the DSI value discloses how fast a company sells its inventory; that is the average time it takes to clear its inventory through sales. A low days sales of inventory (DSI) suggests that a firm is able to efficiently convert its inventory into sales. This is considered to be beneficial to a company’s margins and bottom line, and so a lower DSI is preferred to a higher one.

To make informed decisions based on your Days Sales of Inventory (DSI), you first need to understand how it’s calculated. There are two standard methods used to calculate DSI, both relying on data from your financial statements. Discover how SMBs are using data-driven strategies to navigate tariff-induced supply chain disruptions in 2025. Using AI and machine learning, Inciflo predicts market demands so businesses can stock the right amount of inventory.

• The DSI is high here because the products are high-cost and customers may not buy them frequently.
• The days sales inventory is calculated by dividing the ending inventory by the cost of goods sold for the period and multiplying it by 365.
• While there are many metrics that help brands track inventory management efficiency, days sales in inventory contextualizes this efficiency by putting it into a discrete number of days.
• When you order stock for your retail store, how do you know how much to buy?
• When inventory sits too long (high DSI), it locks valuable cash into unsold products.

A financial ratio called inventory turnover indicates how frequently a business rotates its stock in relation to its cost of goods sold (COGS) during a specific time frame. Days Sales of Inventory (DSI) analysis involves assessing how efficiently a company manages its inventory by measuring the average number of days it takes to sell its inventory stock. The days sales inventory is calculated what is a good days sales in inventory ratio by dividing the ending inventory by the cost of goods sold for the period and multiplying it by 365. To manufacture a salable product, a company needs raw material and other resources which form the inventory and come at a cost.

This may be due to several reasons, including low demand for the product, inefficient inventory management, or inadequate marketing efforts. The ratio indicates the efficiency of a company in managing and selling its inventory. It is important for a company to maintain an appropriate level of inventory to meet customer demand and avoid stockouts, while not holding too much inventory that ties up cash and leads to obsolescence or waste. One financial metric that lets you get insights into inventory is the days sales of inventory calculation. Read on to learn all about it, including the formula to calculate it, its importance, and an example of it in use. Days sales in inventory (DSI) is a metric for those businesses that sell physical products online and/or offline.

What are the risks of aggressively reducing the Average Days Inventory Outstanding ratio?

A low DSI value indicates that a company is more effective at clearing its stock. In contrast, a high DSI value suggests it may have purchased too much inventory or possibly have older stock in its inventory. Management strives to only buy enough inventories to sell within the next 90 days.

Depending on product turnover or seasonality, the recommended DSI ratio can be different. For this reason, it should always be compared to companies with a similar catalog and operation to yours. For most companies, a good DSI is between 3 weeks to 2 months, depending on the product speed, the type of product, the seasonality of the industry, etc. A high DSI can indicate that the production or ordering batches are too large for the demand or signal a problem on one or several sales channels. Get ShipBob WMS to reduce mis-picks, save time, and improve productivity.

If inventory sits longer than that, it can start costing the company extra money. Regularly auditing your stock and removing non-performing items will keep your DSI lean and responsive. Discover why 78% of SMBs struggle to implement effective tariff responses and learn practical strategies to overcome organizational barriers and technology gaps.