Days Sales Inventory: Definition, Formula, Importance & Best Practices

As an eCommerce business owner, you likely keep a watchful eye on your inventory levels. You know having too much inventory on hand ties up valuable cash flow, but having too little means losing out on potential sales. And finding the right balance is challenging. Luckily, there are tools to help and one such tool is Days Sales Inventory (DSI). DSI is a valuable metric for understanding how efficiently your business manages inventory and how quickly you can convert it into sales. If you master this metric, your business will flourish. 

What Is Days Sales Inventory (DSI)?

Days Sales Inventory (DSI) is also known as Days Inventory Outstanding (DIO) or Days in Inventory (DII). This is a financial ratio used to measure how the amount of days a company takes to sell its inventory. DSI is calculated by dividing the average inventory by the cost of goods sold (COGS) per day. The result gives the number of days it takes for a company to turn its inventories into sales.

What DSI Tells You

This inventory calculation is a key metric for eCommerce businesses, as it helps them to manage their inventory levels more effectively and more fully understand their storage costs and inventory turnover ratio. A good DSI (not too low and not too high) is a signifier to investors that the business cash flows, profit margin, and order fulfillment rates are doing well. By monitoring DSI, a company can identify trends and take steps to improve inventory management practices, such as reducing inventory levels, optimizing purchasing, and improving production processes. 

Why the Days Sales in Inventory Matters

There are several reasons why DSI matters. Firstly, a high DSI means a company is holding onto inventory for a longer period, which ties up cash and reduces cash flow. By reducing the DSI, a company frees up cash that can be used for other purposes, such as investing in growth or paying off debt. 

Secondly, holding onto inventory for a longer period increases the cost of carrying inventory, such as storage, handling, and insurance costs. By reducing the DSI, a company lowers its inventory carrying costs and increases its profitability. When this inventory balance is achieved, the company experiences more liquidity, improved profit margin, and becomes more competitive in the market.

Thirdly, a low DSI indicates a company is efficiently managing its inventory items and can quickly convert those items into sales. When a company creates strategies to improve its DSI, they optimize its inventory management practices and improve its customer service, which leads to a more loyal customer base.

Finally, by monitoring DSI, a company can identify trends in inventory turnover and adjust its sales forecasts accordingly. This helps the company to avoid stockouts or excess inventory and improves its inventory management practices. When accurately forecasting sales and managing inventory levels, these factors lead to optimized operations and improved financial performance. If you have a high DSI, but don’t know where to start making improvements, we have inventory management software that can help. 

DSI vs. Inventory Turnover

Days Sales Inventory (DSI) and Inventory Turnover are two financial ratios that are used to measure a company’s inventory management efficiency. Although they are similar, there are some key differences between the two.

DSI measures the number of days it takes for a company to sell its inventory. It is calculated by dividing the average inventory by the cost of goods sold (COGS) per day. The result gives the number of days it takes for a company to turn its inventory into sales. DSI is a useful metric for understanding how efficiently a company manages inventory levels and how quickly it converts inventory into cash flows. This method of calculation is often considered within the valuation process of a company.

On the other hand, inventory turnover measures how many times a company’s inventory is sold and replaced over a period of time. It is calculated by dividing the cost of goods sold (COGS) by the average inventory. The result shows how many times a company has sold and replaced its inventory during a given period. Inventory turnover is a useful metric for understanding how quickly a company is selling its inventory and how efficiently it is managing its inventory levels.

While both ratios provide valuable insights into a company’s inventory management practices, they focus on different aspects. DSI is focused on the speed of inventory turnover, while inventory turnover is focused on the frequency of inventory turnover. By using both DSI and inventory turnover ratios together, companies gain a more comprehensive understanding of their inventory management practices and make informed decisions to improve their inventory ratio and financial performance.

Example of Days Sales in Inventory

Let’s say Company ABC has an average inventory value of $50,000 and a cost of goods sold (COGS) of $500,000 over the last year. Using the formula for Days Sales in Inventory (DSI), we can calculate how many days it takes for Company ABC to sell its inventory:

DSI = (Average Inventory / COGS per day)

DSI = ($50,000 / $500,000/365)

DSI = 36.5 days

This means it takes Company ABC about 36.5 days, on average, to sell its inventory. This metric can be used to benchmark against industry averages and to identify trends in inventory management. For example, if Company ABC’s DSI increases over time, it may indicate that the company is experiencing difficulties in selling its inventory, which could lead to cash flow issues and excess inventory. Conversely, if Company ABC’s DSI decreases over time, it may indicate the company is becoming more efficient in managing its inventory and can quickly turn it into sales. By monitoring DSI and taking appropriate actions to manage inventory levels, Company ABC can optimize its inventory management practices and improve its financial performance.

Days Sales Inventory Formula

The formula for calculating Days Sales in Inventory (DSI) is as follows:

DSI = (Average Inventory / COGS per day)

To calculate DSI, you first need to determine the average inventory value for a given period (usually a year). This is done by adding the beginning inventory value to the ending inventory value and dividing by two.

Once you have the average inventory value, you need to calculate the cost of goods sold (COGS) per day. This is done by dividing the total cost of goods sold by the number of days in the period.

Finally, you can use the formula above to calculate DSI. The result gives the number of days it takes for a company to turn its inventory into sales. These figures are key for your business. Keep them top of mind and included in your monthly or even weekly finance statement. As you grow your business, this number will change. If you keep this number low, your inventory moves from your shelves quicker! 

How Do You Interpret Days Sales

When reading Days Sales in Inventory (DSI), a low DSI is generally better than a high DSI. 

A low DSI means a company is efficiently managing its inventory and can quickly convert it into sales, resulting in improved cash flow, lower inventory carrying costs, and increased revenue and profitability. A high DSI, on the other hand, can mean a company is holding onto inventory for a longer period, resulting in higher costs, reduced cash flow, and potentially lower profitability. A high DSI can also indicate a company is experiencing difficulties in selling its inventory, which could result in excess inventory and a higher risk of stockouts.

While your goal should be to gain a low DSI, the optimal DSI varies by industry and company size. To determine the appropriate DSI for a particular business, benchmark against industry averages and monitor trends over time. This can help businesses to identify areas for improvement and optimize their inventory management practices.

What Does a Low DSI Indicate?

A low DSI has several positive implications for a company. For example, it can lead to improved customer satisfaction, as the company is better able to meet customer demand for its products. It can also lead to increased revenue and profitability, as the company can quickly convert its inventory into cash and make deep investments in its business. Additionally, a low DSI can result in lower inventory carrying costs, such as storage, handling, and insurance costs, which improves the company’s bottom line.

What Is the Average Number of Days to Sell Inventory?

The average number of days to sell inventory varies widely depending on the industry and the company’s business model and inventory management practices. For example, the retail industry benchmark for supermarkets is around 25 DSI, whereas the industry benchmark for cosmetic stores is around 87 DSI. It all depends on the average for your specific industry and product. 

Key Takeaways

By effectively managing inventory levels with the help of DSI, businesses can free up cash flow, reduce costs, increase revenue, and improve customer satisfaction. So, if you want to take your inventory management practices to the next level, start by monitoring your DSI and take appropriate actions to optimize your inventory levels. By doing so, you can stay ahead of the competition and drive long-term success for your business.

Days Sales Inventory FAQs

Should Days Sales in Inventory Be High or Low?

Days Sales in Inventory (DSI) is a financial ratio that measures the quantity of days it takes for a company to sell its inventory. A low DSI is generally better than a high DSI because it indicates a company is efficiently managing its inventory and can quickly convert it into sales.

What Is Day Sales in Inventory Ratio?

DSI ratio calculation shows how many days it takes for a company to turn its inventory into sales. This metric provides insights into a company’s inventory management practices and efficiency.

What Causes Days Sales in Inventory to Increase?

An increase in Days Sales in Inventory (DSI) means a company is taking longer to sell its inventory. This can have several causes, including low demand, excess inventory, slow sales, and inefficient inventory management. If a company’s products are not in high demand, or if it is carrying too much inventory, it can take longer to sell the inventory, resulting in a higher DSI. An increase in DSI often has negative implications for a company. It means they have higher expenses and reduced cash flow. To address an increase in DSI you may need to adjust your inventory management practices. Luckily, ShipHero can help!