DIO is a measure of inventory turnover. Inventory turnover is the average number of days it takes for a business to sell through all its inventory. The lower your DIO, the faster you can get products from suppliers to shelves or from shelves to customers. A business leader could use DIO to determine whether they need to adjust their operations in order to receive products more quickly.
DIO (Days inventory outstanding) is the sum of the lengths in days of all outstanding inventory positions. It’s a measure of how quickly your business turns over its inventory, which you can use to determine whether you need to adjust operations to receive products more quickly. For instance, if you noticed that your DIO has increased by 30% over the last year, this could be an indication that there are problems with your current processes and that some changes need to be made.
The measure was first defined by F.W. Hirschey in his paper Inventory Turnover Rates and Profitability in 1967. In the study, he defines it as “the time required to sell a given dollar’s worth of inventory” or “the number of times per year that a firm sells its average inventory level within an accounting period.”
One of the costs of carrying inventory is the opportunity cost of lost sales. This means that if you were to sell all your product, you would have an additional profit from selling it to a customer before it becomes obsolete or damaged. The cost of capital is also an important factor when calculating inventory holding costs.
If your company has $1 million in cash reserves, then that money could be invested elsewhere instead of being tied up in inventory. The longer your company holds onto its products and resources, the more they are costing you in interest on those funds (the cost of capital).
The total amount spent on stock items includes both holding costs and purchase price; therefore, every time a sale occurs there’s some financial benefit (less money spent on stocking) but also some financial loss due to the fact that we now need to buy new stock items at full price again.
Days Inventory Outstanding is usually calculated as follows: DIO = average inventory/cost of goods sold * number of days.
Generally, having a high DPO is advantageous, because it means that the company has extra cash on hand that could be used for short-term investments.
A DPO of 20 means that, on average, it takes a company 20 days to pay back its suppliers.