Unlock cash flow: Master the Days Inventory Outstanding (DIO) formula

In industries like manufacturing and retail, every decision about inventory affects your bottom line.

• If raw materials pile up on the shelves, they will tie up your working capital and inflate storage costs. 

• But if you run too lean, you risk production delays and missed customer deadlines. 

Balancing inventory is operational and strategic. 

That’s why high-performing businesses track Days Inventory Outstanding (DIO)—a key metric that shows how long it takes to turn inventory into revenue. 

When paired with methods like First-In, First-Out (FIFO)—commonly used to ensure older stock is sold or used first—DIO can give you critical insights into stock efficiency, cash flow, and overall performance.

This guide will show you how to calculate and optimize DIO and use the insights to make smarter, faster decisions.

Here’s what we cover:

What is Days Inventory Outstanding (DIO)?

Days Inventory Outstanding (DIO), also known as Days Sales in Inventory (DSI), measures the average number of days stock sits in your business before it’s sold. 

DIO is a key indicator of how efficiently you turn inventory into revenue.

It’s a direct lever for improving cash flow and optimizing working capital. It allows you to identify where capital is tied up, how inventory performs, and where efficiency gains can be made.

High versus low DIOS: What it means for your business

The DIO measures the average time it takes to sell through inventory, making it a critical indicator of sales efficiency, inventory health, and cash flow performance.

A high DIO means your stock sits too long before selling, often indicating slow sales, over-purchasing, or inefficiencies in production and fulfillment. 

This ties up working capital, increases holding costs, and may signal poor demand forecasting.

• To improve turnover, consider adjusting purchasing strategies, offer targeted discounts, or boost marketing efforts.

A low DIO suggests fast inventory turnover—products are selling quickly, and less capital is tied up in stock. You might have a lean, responsive supply chain.

• However, if DIO drops too low, it may indicate inventory shortages or supply chain risks. 
• Improve demand forecasting, optimize reorder points, and consider increasing stock for high-demand products to maintain a balance.

Days inventory outstanding versus inventory turnover ratio: Key Differences

Your Inventory Turnover Ratio (ITR) measures how many times your business sells and replaces its stock within a given period. 

It reflects the speed at which inventory moves through your business—higher inventory turnover typically signals stronger sales performance and less capital tied up in unsold goods.

Top tip: what is COGS and why does it matter? 

Cost of Goods Sold (COGS) represents the direct costs of producing or purchasing the goods you sell, such as raw materials, labor, and manufacturing overhead.

Both inventory turnover and Days Inventory Outstanding (DIO) use COGS in their formulas because it reflects the actual cost basis of your inventory, not the retail price. 

This makes these metrics more accurate for financial analysis and cash flow planning.

Track both DIO and inventory turnover

It’s smart to track inventory turnover and DIO when assessing inventory efficiency. These closely related metrics offer complementary views of how effectively you’re managing stock.

• For example, if a business has an inventory turnover of 10, it sells and replenishes its inventory 10 times a year. 
• That translates to a DIO of roughly 36 days—meaning, on average, items stay on the shelf just over a month before being sold.

So, how do these two metrics compare?

Metric	Days Inventory Outstanding (DIO)	Inventory Turnover Ratio (ITR)
What it measures	How long inventory stays in stock before it’s sold	How often inventory is sold and replaced during a period
Purpose	Helps assess how efficiently inventory is being held	Helps assess how efficiently inventory is being sold
Formula	(Average inventory / COGS) × number of days	COGS / average inventory
Relationship	Inversely related to turnover	Inversely related to DIO
Ideal outcome	Lower DIO = faster inventory movement	Higher turnover = faster inventory cycling
Use case	Useful for planning storage, holding costs, and cash flow	Useful for evaluating sales performance and inventory efficiency

Since these metrics are inversely related, a lower DIO typically means higher inventory turnover and vice versa. 

You can make smarter decisions about purchasing, storage, and sales strategies by tracking both. 

Why is Days Inventory Outstanding important?

DIO is critical to creating a working capital strategy, your profitability, and cash flow performance. 

It directly reflects how effectively your business turns inventory into revenue, and where capital may be unnecessarily trapped on your balance sheet.

Here are key reasons why monitoring DIO is crucial for your business:

• Cash flow management

Inventory is cash, but in disguise. The longer it sits unsold, the more of your capital is tied up—capital that could be deployed elsewhere in the business

• Profitability and cost efficiency

Lowering DIO helps your business reduce storage costs, minimize losses from unsold goods, and preserve your margin. 

• Drive supply chain performance

DIO highlights how efficiently products move through your operation, informing smarter procurement, production, and restocking decisions.

• Preventing overstocking and stockouts 

A well-optimized DIO helps you strike the right balance, meeting customer demand without overextending your inventory investment.

DIO formula: How to calculate Days Inventory Outstanding

First off, a reminder.

• Days Inventory Outstanding (DIO) helps you understand how long, on average, your inventory sits before being sold. 
• A shorter DIO means your business sells products efficiently; a longer one might indicate overstocking or delays.

Step 1: Understand the DIO Formula

To calculate DIO, you’ll need:

• Average inventory
  = (Beginning inventory + Ending inventory) ÷ 2
  This gives you the typical inventory held during the period.
• Cost of Goods Sold (COGS)
  The total cost of producing or purchasing the items you’ve sold.
• DIO formula
  = (Average Inventory ÷ COGS) × 365
  This tells you the number of days it takes, on average, to turn inventory into sales.

Step 2: Gather your data

Let’s say you’re managing a retail store. Your data for the year is:

Data point	Value
Beginning inventory	$50,000
Ending inventory	$70,000
COGS	$500,000

Step 3: Do the math

Now, let’s break it down.

Calculation step	Formula	Result
Average inventory	($50,000 + $70,000) ÷ 2	$60,000
DIO calculation	($60,000 ÷ $500,000) × 365	43.8 days

Answer: Your store takes about 44 days to sell its inventory.

Step 4: Interpret the results

Now ask questions like:

• Is 44 days good for your industry?
• Are there seasonal trends affecting this?
• Can you reduce inventory without risking stockouts?

Use your DIO to make smarter ordering, pricing, and promotional decisions.

Days Inventory Outstanding examples

Understanding how DIO plays out in the real world can help you improve your benchmark performance, identify inefficiencies, and support more intelligent capital allocation. 

Below are three industry-specific examples highlighting how DIO impacts working capital strategy and operational performance.

Retail: Balancing turnover and availability

You manage the finances of a mid-sized clothing retailer and are evaluating stock turnover to support cash flow ahead of a seasonal shift.

Inventory snapshot:

• Beginning inventory: $40,000
• Ending inventory: $50,000
• COGS: $365,000

DIO = (45,000 ÷ 365,000) × 365 = 45 days

The strategic insight: 

A DIO of 45 days suggests healthy inventory velocity—balancing demand coverage with capital efficiency. 

• Here, working capital is used effectively, but it highlights the importance of tight demand forecasting to avoid markdowns or stockouts as trends shift.

Manufacturing: Capital-intensive operations

You run finances for a furniture manufacturer and want to analyze DIO as part of a broader working capital initiative.

Inventory snapshot:

• Beginning inventory: $700,000
• Ending inventory: $900,000
• COGS: $6,500,000

DIO = (800,000 ÷ 6,500,000) × 365 = 45 days

The strategic insight:
At 45 days, you’re performing well below the industry average of 60–120 days, signaling a well-optimized production and sales cycle. 

• This improves liquidity and reduces your need for short-term financing. 
• However, such performance may also merit a review of stock buffers, ensuring your output can sustain demand peaks or supply disruptions.

E-commerce: Velocity versus volatility

You lead finances for an e-commerce electronics retailer that wants to assess the health of its rapid turnover cycle.

Inventory snapshot:

• Beginning inventory: $25,000
• Ending inventory: $35,000
• COGS: $365,000

DIO = (30,000 ÷ 365,000) × 365 = 30 days

Strategic insight:
A 30-day DIO reflects excellent turnover for fast-moving consumer goods. 

• While this boosts cash flow and minimizes holding costs, you should ensure supply chain resilience to prevent stockouts, especially during demand spikes. 

• Look at technology that can help you with scenario planning, dynamic reordering, or demand-driven inventory models.

What is an ideal DIO Ratio?

It depends on what you’re trying to improve.

There is no universal “ideal” DIO, but there is the right DIO for your industry, business model, and strategic goals. You need to review what this number tells you about your cash flow, inventory risk, and operational discipline.

Key considerations when evaluating your DIO:

• Capital efficiency: is your current DIO helping free up cash, or tying it up in excess stock?

• Customer demand: are you holding enough inventory to meet demand without creating waste?

• Operational risk: does your supply chain support your DIO target without introducing disruption risk?

Typical DIO benchmarks by sector:

• Retail and consumer goods: 30–60 days
• Manufacturing: 60–120 days
• E-commerce and fast-moving goods: 15–45 days

These benchmarks provide a starting point, but you should go further by comparing yourself to peers and analyzing trends over time.

Also, consider aligning DIO with broader financial KPIs like Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO) to get a complete picture of your working capital performance.

Optimize DIO with technology 

You’ll need to use accurate and current data to unlock capital, streamline operations, and accelerate decision-making to get where you need to with DIO. 

That’s where modern inventory management software can come in.

Instead of relying on static spreadsheets and backward-looking reports, look for technology that can integrate real-time inventory tracking, automated DIO calculations, and AI-boosted forecasting into one financial system of record. 

The result? Better inventory decisions that directly impact your bottom line.

Here’s how technology can help you optimize DIO: 

• Automate DIO calculations

No more manual number-crunching—look at financial management technology that automates DIO tracking across product lines, locations, and periods, giving you accurate insights instantly.

• Track inventory in real time

Gain complete visibility into inventory levels, movement, and turnover to identify inefficiencies and adjust faster.

• Forecast demand using AI

Predict future demand more precisely by analyzing historical trends, seasonality, and market dynamics, reducing excess stock and preventing shortages.

• Integrate inventory and accounting

With inventory data fully aligned with the general ledger, seamless financial reporting and more accurate cash flow forecasting are possible.

• Drive strategic working capital decisions

Real-time DIO metrics help you assess where capital is tied up, where to reinvest, and how to align inventory strategy with your broader financial KPIs better.

The bottom line?

With AI-powered tools, you can transform DIO from a passive metric into an active lever for cash flow, profitability, and long-term performance.

Final thoughts

DIO is a strategic lever for improving your liquidity, increasing operational efficiency, and helping you make smarter financial decisions. 

By actively monitoring and optimizing DIO, you’re better positioned to free up capital, reduce waste, and align inventory performance with your business goals.

With financial management tools like Sage Intacct, you can move beyond manual calculations and fragmented data and have a tool at your fingertips that keeps you agile, getting the most out of your finances every day. 

From AI-powered demand forecasting to real-time inventory tracking and automated reporting, you can get the control and insight you need to transform inventory into a source of competitive advantage.

Take control of your inventory performance. Learn how Sage Intacct can help you unlock working capital and make smarter decisions with AI-driven insight.