Days in Inventory Explained? How It Works and Why It Matters?
- mark599704
- 21 hours ago
- 12 min read
Table Of Content?
Keeping products moving is essential for any organization that relies on physical goods. Leaders often look for clear signals that show whether stock levels are healthy, sales are flowing as expected, and resources are being used wisely. One of the clearest indicators is a metric that reveals how long items remain within a company before being converted into revenue. Understanding this timeline offers insight into operational rhythm, financial stability, and the overall effectiveness of the supply process.
This guide introduces the indicator in simple terms, shows how Days in Inventory is determined, and explains why it matters for decision-making. You’ll also learn how shifts in this number can highlight hidden opportunities or expose potential trouble long before it becomes obvious. Whether you’re evaluating performance, refining planning habits, or improving forecasting, this is a crucial concept worth mastering.
What Is Days in Inventory (or Days Sales Inventory)?
Days in inventory (DII), also called days sales in inventory (DSI), days in inventory outstanding (DIO), and inventory days of supply, show how many days of sales (in dollars) a business keeps in its inventory. Many people think DII means how many days it takes to sell all inventory. They believe that if DII is 40 days, then all items will be sold in 40 days. This is only true if the business sells one type of product. If a business sells many different products, DII shows the average speed of inventory turnover in dollars. Some products may sell many times within those 40 days. Others may take much longer to sell.
Key Takeaways
Days in inventory is a measure that shows how long it takes a business to make sales equal to the value of its inventory.
If products stay in inventory for a long time, more of the company’s cash is tied up. This may also mean the company is making too many products or that sales are slowing.
Days in inventory need context and other metrics to be truly useful. On its own, it does not show all the important details a business needs for good decisions.
Days in Inventory Explained
DII comes from a simple question many business owners ask: How many days will my inventory last? The modern DII formula uses accounting numbers, so it answers this question in dollar terms and as an average. This means DII shows how long it takes, on average, for total sales to match your average (or current) inventory value. Companies and investors use this number, often for a recent quarter or year, to compare efficiency in sales and inventory management.
When DII goes up, it usually means the company is holding more inventory or that sales are slowing. A lower DII is generally better, but the best level depends on the industry and the business. The right number is always above zero, because you never want inventory so low that you cannot fill orders.
DII can help with planning, but only if the average does not hide important seasonal changes. For example, if your business is seasonal, a yearly average may not tell you much. It is also important that your costs and sales environment stay mostly the same during the period you are studying. If you expect something big to change your future DII, like a new supply chain or a new product, then your past DII will not be very helpful for planning.
Related Blog:
Why Is DII/DSI Important?
By itself, DII is not very important. Some financial analysts may say this sounds wrong. They might argue that, if two companies are very similar, the one with the lower DII usually manages inventory better. This is true, but only because most companies do not treat DII as their main metric.
You can easily “game” DII. This means you can make the number look better or worse without actually improving the business. For example, imagine a company tells employees to focus only on lowering DII. Employees would avoid keeping extra stock. The company would often run out of products. Customers would be disappointed, and the business would lose sales. This does not mean DII is useless. It just must be read with other information. In general, a lower DII is better. It means the company has less cash tied up in inventory and is selling products well. But the full picture matters.
There are good reasons a company might choose to increase DII. Supply chain problems might make it harder to restock fast, so the company keeps more inventory. A supplier might offer a discount for buying larger amounts, making extra inventory worthwhile. If running out of stock even once could make you lose customers, you may want more inventory on hand.
Related Blog:
Why Businesses Should Care About Days in Inventory?
Businesses should care about DII for three reasons:
1. DII Helps with Inventory Management
The backward-looking formula shows how the business performed in the past quarter or year. Using the same idea with sales forecasts and current inventory, especially with an ERP system, can help predict where the business is heading. DII matters most for companies that sell physical goods. It is especially important for businesses with perishable products. If DII gets too high for items that can spoil, the business may face big losses. For non-perishable goods, a high DII usually means higher carrying costs and lower liquidity, but not total loss.
Related Blog:
2. DII Shows Efficiency
One number by itself may not say much. But if a business tracks DII over time, it can spot changes and trends. A slow, steady drop in DII might show that a new sales plan is working. A sudden rise might show a problem. (But remember, DII alone should not be used to make a final judgment.) DII can also help compare similar companies in the same industry.
3. DII Affects Cash Management
If too much cash is tied up in inventory, a business may struggle to pay suppliers or invest in new opportunities. Holding inventory can also be expensive. Tracking DII helps prevent these problems.
Related Blog:
DII/DSI Formula and How to Calculate It?
There are a few ways to calculate DII, but the most common formula is:
Days in inventory = (average inventory ÷ COGS) × number of days in the period |
Average inventory is the average dollar value of inventory during the time period. COGS means the cost of goods sold in that same period. For a yearly calculation, you use the year’s average inventory and the year’s COGS, then multiply by the number of days in the year. If the company makes its own products, the inventory number should include items still being worked on. The result depends on how you calculate “average” inventory. The usual method is:
(beginning inventory + ending inventory) ÷ 2. |
But this can hide important details. Imagine two companies with the same fiscal year, starting with $1,000,000 in inventory and ending with $1,200,000. Both would report an average inventory of $1.1 million. But one company may have gone up to $3 million and then dropped back down. The other may have gone down to $500,000 and then climbed back up. Their real daily inventory levels were very different, even though the average looks the same.
You can also change the formula to make it more forward-looking. In this version, you replace average inventory with current inventory. Everything else stays the same. This shows how many days of inventory you have right now. This method assumes that the cost of today’s inventory and the selling rate will stay about the same as they were during the period used for the COGS and day count.
DSI vs. Inventory Turnover
Inventory turnover is a metric related to DSI. It shows how many times a company sells or uses its inventory in a time period, like a quarter or a year.
Inventory turnover is calculated as:
Inventory turnover = COGS ÷ Average inventory |
DSI and inventory turnover are linked:
DSI = 365 ÷ Inventory turnover |
In other words, DSI is the inverse of inventory turnover. A higher DSI means lower turnover, and a lower DSI means higher turnover. Generally, higher inventory turnover is better. It shows the company is selling more. Having a smaller inventory with the same sales also increases turnover. However, high turnover doesn’t always mean success. If product demand is higher than inventory, the company may still lose sales.
That’s why DSI and turnover should be compared to industry standards. DSI is the first part of the cash conversion cycle (CCC). CCC measures the total time it takes to turn inputs into cash from sales. The other two parts are:
Days Sales Outstanding (DSO): How long it takes to collect money from customers.
Days Payable Outstanding (DPO): How long it takes to pay suppliers.
CCC measures the average time each dollar is tied up in production and sales before it becomes cash from customers.
Related Blogs:
What’s an Ideal Days Inventory Time?
The answer is: it depends. The ideal DII depends on a few things:
Does your company have enough cash to buy the inventory it needs?
How does your company calculate inventory?
How long does it take to restock?
The most important thing is accurate restocking timing. Knowing your suppliers’ delivery times and how long it takes to replenish stock helps you decide your ideal DII and safety stock.
Example:
If you have 10 days of inventory but it takes 21 days to restock, there is a gap. If you order today, it will take 21 days to get more products. In 10 days, you will run out. This means you will be out of stock for 11 days and unable to meet customer demand. This is a risky situation.
Benefits of Calculating Your Days in Inventory
One big benefit of calculating DII is benchmarking. A business can compare itself to similar public companies and also compare its own results over time. A slow and steady drop in DII may show better inventory management or better sales forecasting. If the trend suddenly reverses, it may warn leaders about a problem, such as issues with staff or suppliers, that they might not have noticed otherwise. The direction of DII over time, along with other metrics, can help guide business strategy.
Related Blog:
When benchmarking, a business must make fair comparisons. If a company sells phones, it should not compare itself to a company like Apple that sells many different products. Seasonal businesses should also avoid comparing quarters that naturally vary because of the seasons. Some investors like to see DII. If your financial statements are not public, adding DII to reports or presentations may be helpful.
Examples of Days in Inventory (DII/DSI)
Let’s look at a few ways to calculate DII Inventory. We will start with a well-known company that sells mainly physical goods: Target. Its basic financial data is available online.
Example 1:
At the end of fiscal year 2020, Target had $8.99 billion in inventory. At the end of fiscal year 2021, it had $10.65 billion. In fiscal year 2021, Target’s total COGS was $65.7 billion. To find Target’s DII for fiscal year 2021, we use the formula:
DII = [(average inventory)/(COGS)] x (days in time period) |
In this case, average inventory = ($8.99B + $10.65B) / 2 = $9.82B, and COGS = $65.7B. So:
DII = ($9.82B/$65.7B) x 365 = 54.6 days |
Example 2:
Now, let’s look at more recent data instead of the whole year. We will use the most recent quarter and the ending inventory instead of the average inventory.
For the quarter ending October 31, 2021, Target’s COGS was $18.13 billion, and its inventory was $14.96 billion. We can calculate DII for this quarter using the same formula:
DII = ($14.96B/$18.13B) x 90 = 74.3 days |
We see a much higher DII for the last quarter, over a third higher than before. So, what do these numbers mean?
Interpreting the results: Both calculations are higher than in previous periods. The quarterly DII is also higher than the same quarter last year. It seems the most recent quarter caused the increase for the whole year. Target has had positive sales growth in recent quarters and years. Does the higher DII mean Target is less efficient at managing inventory and forecasting sales? Labor shortages and supply chain problems could be a reason.
But another explanation is that Target increased its inventory on purpose. More inventory helps avoid stockouts, especially before the busy winter holiday season. This could be a careful strategy to meet demand and reduce risks. Another idea is that Target expected faster sales growth. Remember, DII uses past COGS. If sales grow faster than before, it wouldn’t take the full 74 days to sell inventory in that quarter.
So, should we worry? Target investors do not seem worried. Target stock has done well over 1-, 6-, and 12-month periods. With strong sales and careful inventory planning, the increase in DII likely shows a strategic decision, not inefficiency.
Lesson: You cannot judge a business by DII alone, even when the numbers look big. |
Low and High DII/DSI
What counts as a low or high DII depends on the industry, the company, and the situation. For example, a milk seller with a DII of 50 days may have too much inventory. But Target has a DII over 50 days and raised it on purpose. This is why it’s often better to talk about “higher” or “lower” DII instead of “high” or “low.” Even then, the numbers must be looked at in context. For internal use, a company might calculate DII for different products.
Think about the milk seller versus Target. Target sells milk, too, but it does not keep 74 days of milk in stock. That 74-day number is an average. DII can vary a lot by product type. Maybe it’s 10 days for dairy products and 100 days for furniture. A blended average may not tell the full story. In addition to context, a more detailed analysis may be needed.
Other Names for Days in Inventory
There are several names for days in inventory. Each name has its own acronym. This can make it seem like they are different, but they usually mean the same thing. Sometimes they are used in slightly different situations.
1. Days Sales in Inventory (DSI)
You may see the term days' sales in inventory, or DSI, very often. DSI shows the average number of days a business needs to turn its inventory into sales. People use DSI when they want to highlight how long the current stock will last.
2. Days Inventory Outstanding (DIO)
DIO stands for days' inventory outstanding. It is the same financial ratio as days in inventory or DSI. DIO shows the average number of days it takes for inventory to be sold. It is often used just like DSI.
3. Inventory Days on Hand (DOH)
DOH means inventory days on hand. It is the same as DII, DSI, and DIO. DOH tells you how many days the inventory stays in stock.
Manage and Monitor Inventory Values With Dynamic Distributors
Dynamic Distributors' Inventory Management helps businesses track and monitor their inventory. It makes it easy to gather data and calculate metrics. These metrics can be customized and exported for further analysis. They also have tools to optimize inventory, which can affect DII. Another benefit of inventory management, like Dynamic Distributors, is that it can track data for individual products, not just the whole company. This avoids the problem of averages hiding important details, as we discussed earlier.
FAQs
What Is an Ideal Inventory Time or Number?
There is no single “ideal” number of days in inventory. It depends on the industry, company, location, and situation. For example, supply chain problems may increase the ideal number. Selling perishable goods limits how high the number can be.
How Can Inventory Management Help?
Inventory management helps businesses track inventory better. It also calculates metrics like DII in real time. You don’t have to wait for quarterly or yearly financial statements. You can get metrics for any period you choose.
What Is the Meaning of Days of Inventory?
DII shows how many days it takes to sell your current or average overstock inventory. Inventory is measured in dollars, not in units. This means it doesn’t show how long it would take to sell every single item in stock.
Related Blog:
Should My Business Have Low or High Days in Inventory? Which One Is Better?
In general, a lower DII is better. But you should not make it too low. Too low DII can cause stockouts, which frustrate customers. It can also raise costs if you need to restock more often in smaller amounts.
What’s the Difference Between Days in Inventory and Inventory Turnover?
DII shows how long it takes, on average, for a business to sell its inventory. Inventory turnover shows how many times, on average, the business sells and replaces its inventory in a period.