Why days inventory outstanding (DIO) matters to a first-time founder
Average inventory age estimates how long cash remains tied up in stock before sale. A rising figure can signal slowing demand, excess purchasing or products that can no longer be sold normally, while a very low figure can indicate missed sales because stock is unavailable. Founders should examine each product category because one average can hide both fast-selling and stagnant items.
Examples of days inventory outstanding (DIO)
A retailer has average inventory of ₦150 million and annual cost of sales of ₦900 million. Using 365 days, average inventory age is about 61 days: ₦150 million divided by ₦900 million, multiplied by 365. Monthly average inventory may be more representative if the business is seasonal.
Common misunderstanding
The result is an estimate, not the actual age of every item. The calculation may use 365 days, 360 days or the number of days in the period. Average inventory may use only opening and closing balances or many observations. Cost of sales, not revenue, is normally used, because both inventory and that cost are measured at cost rather than selling price. For goods, the cost figure is cost of goods sold.
When to use it
Use it in inventory planning, cash-flow reviews and comparisons over time. State the period, number of days, method used to average inventory and how costs are measured. Pair the result with the actual age of each item, missed sales from unavailable stock, price reductions and stock removed from the accounts before changing purchasing or product-range decisions.