![]() A company can realign itself through DIO analysis and adjust its assortment to customer demand.Ī sub-optimal warehousing strategy can also be the reason for a very high Days Inventory Outstanding value, e.g. This analysis can therefore lead to strategic decisions: Is it still worth selling this product then?īy getting rid of poor-selling products, one can focus on those that sell well and possibly even make room for new products in the warehouse. If a product lies in the warehouse for a very long time, this is an indicator that it is not selling very well. This will give an impression of which products are selling faster than others. It is advisable to calculate a DIO value for each individual product. If the Days Inventory Outstanding analysis shows that DIO is very high compared to competitors, the company should review its inventory. Days Inventory Outstanding analysis for better performance Non-industry comparisons are not useful for the DIO value. So if a company wants to find out whether its DIO value is OK, it should look at the values of other companies in the sector and compare itself with them. While DIO values are very low in food processing, they can be much higher in other industries (e.g. The DIO value is highly dependent on the industry in which a company operates. Days Inventory Outstanding industry average However, because it has pre-financed the procurement of the raw material and also has to cover the production costs and all other costs, it has less cash available. ![]() The company therefore has delayed revenues. If the DIO value is very high, it means that a lot of time elapses between the receipt of the raw material and the sale of the finished product. The example above shows that a low Days Inventory Outstanding is advantageous because the faster a product leaves the warehouse, the faster the company generates revenue through sales. Interpretation of Days Sales Outstanding: High or low better? This means that the stock is completely turned over 4 times a year and the old stock is replaced by new stock. Inventory Turnover = cost of goods sold / average inventory The latter indicates how long it takes until the stock has been completely sold out and replenished with new stock. ![]() Inventory Turnoverĭo not confuse Days Inventory Outstanding with Inventory Turnover. Then the company can compare which products have less time in the warehouse until they are sold. In this way, DIO values can also be calculated for different products. It therefore takes an average of 45,625 days for the finished products to be sold after receipt of the raw material. Now we want to calculate the Days Inventory Outstanding. For all its products it has had production and selling costs of £200,000 during the year. At the end of the year it has £20,000 worth of stock. Days Inventory Outstanding: ExampleĪ company has £30,000 worth of stock at the beginning of the year. Costs of goods sold are all costs associated with the production and sale of the products. In the above formula, average inventory is the total value of inventory during the period under consideration. It is important that the period under consideration is always identical for both average inventory and cost of goods sold, otherwise you will get an incorrect value for DIO. 90, if you want to look at the DIO value per quarter. ![]() You can also multiply by another number, e.g. Multiplication by 365 indicates that the DIO value refers to the time span of one year. To calculate the Days Inventory Outstanding, one puts the average inventory in relation to the production and sales costs:ĭIO = average inventory / cost of goods sold x 365 So with DIO you measure the average storage time. If you calculate DIO for a single product, you look at the time from when the raw material is received to when the finished product is sold. DIO is therefore important in liquidity management because the less capital is tied up in inventory, the more cash the company has available.ĭIO can also be used to assess how well a product is selling and what the inventory efficiency is in general. The Days Inventory Outstanding (DIO) ratio indicates the length of time a company's capital is tied up in its inventories. In this article we will show you why this indicator is important for cash flow management, how it is calculated and how it can be improved. It indicates the period between the receipt of raw materials and the sale of the finished product. Days Inventory Outstanding is an important key figure in inventory management.
0 Comments
Leave a Reply. |