Days Sales in Inventory DSI: How to Calculate It & Importance

It’s an essential metric that helps you assess inventory efficiency, optimize cash flow, and evaluate your overall business health. This is because the final figure that’s determined can show the overall liquidity of a business. Investors and creditors want to know more about the business sales performance. The more liquid a company is, it will likely translate into having higher cash flows and bigger returns. For example, if you are preparing for a high season of sales, a higher days sales in inventory is only a sign of what’s to come. In this case, having cash tied up in the form of inventory isn’t a bad thing, as it prevents future bottlenecks and ensures a higher probability of being able to cope with the rising expected demand.

Both investors and creditors want to know how valuable a company’s inventory is. Older, more obsolete inventory is always worth less than current, fresh inventory. The days sales in inventory shows how fast the company is moving its inventory. Since DSI indicates the duration of time a company’s cash is tied up in its inventory, a smaller value of DSI is preferred. On the other hand, a large DSI value indicates that the company may be struggling with obsolete, high-volume inventory and may have invested too much into the same. It’s also possible that the company may be retaining high inventory levels in order to achieve high order fulfillment rates, such as in anticipation of bumper sales during an upcoming holiday season.

FAQs on Days Sales of Inventory

Brands can ensure optimal inventory levels with real-time tracking, low inventory level alerts, and a predictive view of remaining products. While a low days sales in inventory is better for most brands, brands need to ensure they have enough stock to meet customer demand. This tracking will also allow businesses to have a better understanding of their inventory value. Days Sales in Inventory (DSI) is a financial metric that measures the average number of days a company takes to sell its entire inventory during a specific period. It provides insights into the efficiency of inventory management, reflecting how well a company can convert its inventory into sales.

If a company sells more goods than it does services, days sales in inventory would be a primary indicator for investors and creditors to know and examine.
Days sales in inventory (DSI) measures the average number of days a brand takes to sell through its inventory.
The ADIO ratio is a critical performance indicator for businesses, as it helps them assess their inventory management efficiency.
According to Investopedia, DSI indicates the average time inventory remains unsold before becoming revenue.
DSI is calculated based on the average value of the inventory and cost of goods sold during a given period or as of a particular date.

How to Calculate Days Sales in Inventory (DSI)?

By understanding DSI, companies can assess their liquidity and operational efficiency, which are vital for strategic decision-making.
Cost of Goods Sold (COGS) also known as cost of sales refers to the expenses of manufacturing the products sold by an organization.
A stock that brings in a higher gross margin than predicted can give investors an edge over competitors due to the potential surprise factor.
Reducing the size of your inventory can help alleviate unnecessary storage costs and reduce staffing needs—all while decreasing your DSI.

To use this formula, you’ll divide your average inventory by your COGS, then multiply the result by 365—the number of days in a year. The product is how many days it would take to sell your average inventory. The influence of DSI on profitability and liquidity cannot be overstated. By maintaining an optimal DSI, companies can ensure that capital is not unnecessarily tied up in inventory, thereby enhancing liquidity and enabling investment in growth opportunities. This result indicates that, on average, it takes the company approximately 91 days to sell through its inventory.

What is Average Inventory and How to Calculate it?

Mattias is a content specialist with years of experience writing editorials, opinion pieces, and essays on a variety of topics. He is especially interested in environmental themes and his writing is often motivated by a passion to help entrepreneurs/manufacturers reduce waste and increase operational efficiencies. He has a highly informative writing style that does not sacrifice readability. Working closely with manufacturers on case studies and peering deeply into a plethora of manufacturing topics, Mattias always makes sure his writing is insightful and well-informed. The cost of goods sold (COGS) is another crucial accounting metric that designates the total cost of manufacturing all the finished goods that are sold within a fiscal period. By tracking the DSI ratio of suppliers, businesses can identify which suppliers are performing well and which are not.

Step 2 – Identify COGS

The financial ratio days’ sales in inventory tells you the number of days it took a company to sell its inventory during a recent year. Keep in mind that a company’s inventory will change throughout the year, and its sales will fluctuate as well. A high Days Sales of Inventory (DSI) may indicate excess stock, inefficient ordering, or slow-moving products—all of which can tie up cash and erode profitability. Fortunately, there are proven strategies and modern tools that can help you improve your DSI and build a more agile inventory system. The distributed network also allows brands to allocate different inventory levels at different warehouses.

what is a good days sales in inventory ratio

Inventory turnover measures how frequently inventory is sold or used during a given time frame, such as a year. Inventory turnover, in simple words, is an indicator of how a company handles its inventory. If the inventory turnover ratio is high, the company handles the inventory well, and the stock is not outdated, which naturally means lower holding costs. A financial ratio called days sales of inventory (DSI) shows how long it typically takes a business to sell the products in its inventory. The landscape of DSI measurement is evolving, driven by technological advancements and changing business priorities. Emerging technologies such as artificial intelligence and machine learning are transforming how companies track and analyze DSI.

COGS

Analyze these questions regularly to fine-tune your business’s forecasting, procurement strategies, and operational plans to align inventory closely with market demand. When inventory sits too long (high DSI), it locks valuable cash into unsold products. This leaves what is a good days sales in inventory ratio less money available for investments in marketing, new products, or operational improvements.

Company XYZ has an average inventory of $500,000, a cost of goods sold of $2,000,000, and a reporting period of 365 days. The average inventory is a KPI signifying the estimated average value of inventory on hand at a given time. It’s calculated by summing up the beginning and ending inventory values for a given period and dividing them by 2. A recent study suggests that organizations with high inventory turnover ratios and low DSIs help you stay afloat in the market. Secondly, when the maintenance cost, rent, security cost, and other expenses of holding inventory are not managed efficiently, it directly impacts your profit margin. Hence, DSI value helps you to study the movement of the goods in the supply chain.

Step-by-Step Example Calculation

Once you have already calculated your average days-to-sell inventory formula, it’s time to assess how good the ratio is for your business. High DISs can go against cash flow forecasts, reducing profitability due to storage costs and situations when a company may need to get rid of inventory because of its expiry date or shelf life. While there is not necessarily one perfect DSI, companies typically try to keep low days sales in inventory. A lower DSI indicates that inventory is selling more quickly, which is usually more profitable than the alternative.

The Current Ratio is a liquidity ratio that measures a company’s ability to pay its current liabilities using its current assets. Gross Profit Margin (GPM) is a ratio that measures a company’s profitability after deducting the cost of goods sold (COGS). Using those assumptions, DSI can be calculated by dividing the average inventory balance by COGS and then multiplying by 365 days.

These can include progress payments, raw materials, work in progress, and finished goods. As well, this ratio can be important to plan for future demand, such as market demand and customer demand. For example, costs can include the likes of labor costs and utilities, such as electricity. Ultimately, they’re defined as the costs incurred to acquire or manufacture any products that are created to sell throughout a specific period. To get a better understanding of your business, you can use a variety of financial ratios.

However, the days sales in inventory is a metric that is also considered by investors, as it is part of the cash conversion cycle (CCC). In the end, knowing how long it takes a company to transform inventory into cash flows is an essential factor in determining the profitability of a business. But if the DSIs are different, it doesn’t necessarily mean one company’s inventory management is any less efficient than the other. The variation could be because of differences in supply chain operations, products sold, or customer buying behavior.