If you sell tangible goods, you know how difficult it can be to get your inventory levels just right. You want to have enough stock on hand so you can meet market demand, but not so much that you’re spending most of your budget on storage. Days in inventory (DII) is a financial ratio that can help you measure the success of your inventory control—the process by which you maintain optimal stock levels.
What is “days in inventory” (DII)?
Days in inventory is a figure that tells you how many days it would take to sell your average stock of inventory. Also called days sales inventory (DSI) and days inventory outstanding (DIO), DII compares your rate of sales and average value of your inventory.
DII can help you measure the success of your inventory control: Is your inventory the right size in relation to your rate of sales? In general, a DII between 30 and 60 days is optimal and means you’re selling your products quickly and efficiently (though, of course, it varies depending on your industry and company size).
How to calculate days in inventory
To calculate DII, you need to know the following figures:
- Average inventory. This figure is the average dollar value of the inventory you have at any given time—typically, it’s the value of your beginning inventory plus the value of your ending inventory, divided by two. This number is based on what you pay to purchase your inventory, not on your products’ sale price (or how much you would receive from customers if you sold every unit).
- COGS. Cost of goods sold (COGS) is the direct cost of producing products sold by your business. You calculate it by adding together the cost of your beginning inventory plus any purchases you made during the time period, then subtracting ending inventory.
- Days in period. Since the DII formula specifically mentions days, this number is about dispersing the value of goods sold across the number of days in the accounting period. This number is flexible, depending on how long of a period you want to evaluate. This might be 365 days for an entire year or 30 days for just the month of April.
Days in inventory formula
The most common notation for the days in inventory formula looks like this:
DII = (Average inventory / COGS) x Days in period
You can also use this version of the formula:
DII = Average inventory / (COGS / Days in period)
In this formula, you first divide the cost of all the products you sold in a given period (represented by COGS) by the number of days in the period, so that you end up with a figure representing the average value of goods sold per day. Then, you simply divide your average inventory for the time period by that number to find out how many days it would take you to sell all of your inventory.
You can find data for your average inventory and COGS on your end-of-period balance sheets. If you sell through Shopify, you can look at your inventory reports.
Example days in inventory calculation
Let’s say you run a retail business selling novelty t-shirts and you want to calculate days in inventory for your stock over your first month in business. At the beginning of the month you bought $4,000 worth of stock, and at the end of the month you have $2,000 worth of stock left.
Using the formula DII = Average inventory / (COGS / Days in period), here’s how you calculate inventory days for your business.
To find your cost of goods sold, subtract the value of your ending inventory from the value of your starting inventory. This determines the total cost of the products that you sold. This would be $4,000 – $2,000 = $2,000. (This is, of course, assuming you didn’t purchase any additional t-shirts throughout the month to refresh your stock—if you did, you would add those to the total as well.)
Next, you’ll divide your COGS value by the number of days in the given period. In our example, since you’re calculating inventory days over the course of a month, let’s say the time period is 30 days. This would result in $2,000 / 30 = $67 (approximately), meaning you sold an average of $67 worth of goods per day during the month.
Next up is to figure out your average inventory. In the t-shirt example, you started with an inventory value of $4,000 and ended with a value of $2,000. To average the two numbers, simply add them together and divide by two: ($4,000 + $2,000) / 2 = $3,000.
Once you have your figures for COGS per day and average inventory, you simply plug them into the denominator and numerator of the DII formula: $3,000 / $67 = 45 days (approximately). This means that, on average, it will take your business 45 days to sell the entire inventory you have on hand.
What does calculating DII tell you?
Your company’s DII tells you how long it will take you to sell a given amount of inventory. As a ratio between your average inventory size and your rate of sales, it can additionally help you see if these numbers are healthy in relation to one another.
In general, a DII between 30 and 60 days is optimal for inventory effectiveness, and it means you’re selling your products quickly and efficiently (though it of course varies depending on your industry and company size). A higher DII could mean your sales process is too slow or you’re storing too much stock, while a lower DII could mean you’re not storing enough inventory and may be risking a stockout if demand increases.
While DII is useful for helping you get a broad picture of your company’s inventory management, it’s only part of the story. While it’s true that a lower DII is typically better, there are plenty of situations in which a business may make a choice that increases its DII. For example, if the supply of your product has recently been unstable, you may choose to increase inventory of it to avoid restocking issues.
What is the difference between DII and inventory turnover?
The days in inventory figure is closely related to another inventory number: the inventory turnover rate. Both DII and inventory turnover overlap in their main variables: average inventory and COGS. This means that both formulas evaluate the relationship between the size of a business’s inventory and its rate of sales.
While the DII formula measures the average number of days it takes to sell average inventory, the inventory turnover formula measures the average number of times a company sells its average inventory in a set time period. When DII increases, the inventory turnover ratio decreases, and vice versa. If the number of days that it takes to sell inventory increases, then it’s only natural that the number of times inventory turns over in a time period decreases.
Days in inventory FAQ
How can a company improve its days in inventory ratio?
Since days in inventory is a financial ratio between sales rate and inventory size, companies can achieve a lower DII by increasing their rate of sales or reducing the amount of excess stock they keep in storage. In general, a DII between 30 and 60 days is optimal; however, a low DII won’t necessarily improve your operations. If your DII drops too low, it could mean you’re not storing enough inventory and may be risking running out if demand increases.
What does a high DII mean?
A high days in inventory ratio means your sales are slow or you have a lot of inventory sitting in storage. To lower your DII, you could increase your rate of sales or reduce your amount of excess stock. However, there are plenty of reasons a company may want to maintain a higher DII. For instance, in the face of supply chain issues, a business may choose to increase its inventory to avoid stockouts.
How does a company’s days in inventory relate to its cash flow?
A company’s days in inventory ratio is directly related to its cash flow. A low DII is a sign a company has a healthy cash flow, while a high DII can signal the company’s cash flow is slow. DII is one variable, along with days sales outstanding (DSO, the average time it takes to receive cash for accounts receivable) and days payables outstanding (DPO, the average time it takes to pay off accounts payable) that financial analysts use to evaluate a business’s cash conversion cycle (CCC).
