What Is Days Sales In Inventory? (And How To Calculate It)
Updated 12 October 2022
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Businesses use days sales in inventory (DSI) to determine the efficiency of their sales. It is a metric value that can help businesses improve their sales and help maintain their inventories. Knowing what DSI is and how to calculate it can help you manage the inventory for a business in a better way. In this article, we define what days sales in inventory is, explain how to calculate a business's DSI, discuss its importance, state the difference between high and low DSI, compare it to inventory turnover and provide some examples to help you understand DSI better.
What Is Days Sales In Inventory?
Days sales in inventory, also known as inventory days, is a ratio that indicates how many days a business takes to convert its inventory into sales. This inventory can goods and the products or services that may still be in progress. This ratio shows how long the stock in a business's inventory may last. Companies typically prefer a lower DSI as it may indicate that their stock may sell out faster. A higher DSI may be a sign of the company selling its goods at a slow pace. A suitable DSI for companies typically differs from industry to industry.
Related: How To Calculate Inventory Accuracy (And Tips To Improve It)
Formula To Calculate The DSI Of A Company
Here is the formula that you can use to calculate the DSI of a business:
DSI = Average inventory / COGS x 365
The formula consists of two variables. The first is average inventory, which is the total amount of inventory a company has to sell. It can include the costs for the company to acquire those goods or the raw material to develop a product. COGS, short for cost of goods sold, is the cost a company incurs for manufacturing the goods. This can include labour costs and costs of utilities like electricity and transport. Businesses typically calculate DSI over a period of 365 days. Some businesses may calculate it for a quarter, or 90 days.
Related: Inventory To Sales Ratio (Definition And Importance)
How To Calculate DSI?
Here is a step-by-step process that can help you calculate the DSI for a business:
1. Calculate the average inventory
The first step in calculating the DSI is to determine the average inventory. This is the average of the inventory items over two or more accounting periods. You can calculate the average inventory by adding the beginning inventory to the ending inventory and then dividing the sum by two. Here is the formula for calculating the average inventory:
Average inventory = (Beginning inventory value + Ending inventory value) / 2
Related: 14 Types Of Inventory (Plus Effective Management Tips)
2. Determine the cost of goods sold
After determining the average inventory, you can calculate the cost of goods sold or COGS. It is the direct cost of a product that a business sells. This may include the cost of manufacturing or acquiring the goods. For retailers, the cost of goods sold is the cost at which they purchase the goods from a wholesaler. COGS typically excludes expenses like sales, marketing, distribution and any other overhead costs. Here is the formula for calculating COGS:
COGS = (Beginning inventory value + Purchase made) - Ending inventory value
Related: Understanding Cost Of Goods Sold (With Formula And Methods)
3. Calculate the DSI
After determining the average inventory and the COGS, you can accurately calculate the DSI for a business. You can divide the average inventory by the COGs and multiply the value by a time period. This time period is usually 365 days. If you can also use 90 days as your time period if you wish to calculate your DSI per quarter.
Related: What Is An Inventory Write-Off? (Plus How To Conduct One)
Importance Of DSI
DSI can be more important to companies that sell physical goods than those that sell services. This metric helps companies determine how much of their inventory they can sell in a specific time period. Apart from the companies, this data can be valuable to investors and creditors. DSI basically shows the liquidity of a business. The more goods a company sells, the more profit it is for the investors. It also means that higher liquidity means higher cash flow and returns for the company.
The DSI of a company can also help determine other expenses related to its inventory. For example, if a company is unable to sell off its inventory. It may incur more costs in storage. This may affect the profit margins of the company. The longer a company holds its inventory, the more cost it may incur in its storage and maintenance.
Related: What Is An Inventory Manager? (Plus How To Become One)
High DSI Vs Low DSI
For most businesses, having a low DSI can be good. It typically indicates that the stock is moving out quickly and the sales of the business are positive. It also shows that the business has enough inventory against the sales. Also, it can be beneficial to sell out the stock as it reduces the chances of goods becoming obsolete.
There are also scenarios where having a high DSI can be beneficial. This is usually when a business wants to stockpile goods for an upcoming sale. It is also helpful during high customer demand. Some businesses may require fulfilling customer demands at a rapid pace. Having a larger inventory can help them achieve this.
Related: What Does A Sales Engineer Do? And How To Become One
DSI Vs Inventory Turnover
Inventory turnover is a similar ratio to DSI. While DSI shows how many days it takes a business to convert its inventory into sales, inventory turnover shows how many times a company can restock its entire inventory. A company typically measures this for a specific period. The formula for calculating inventory turnover is:
Inventory turnover = COGS / Average inventory
Businesses typically aim for a higher inventory turnover and a lower DSI. A high inventory turnover means that a company is restocking its inventory frequently. This would indicate that it is selling its goods at a faster pace. It would also mean that the company has a lower DSI. As it shows the speed at which a business sells its goods and restocks them, inventory turnover is an essential metric along with the DSI.
Related: What Is Turnover And Why Is It Important In Business?
Examples Of DSI
Here are some examples of DSI in various business scenarios:
Example of DSI at a guitar store
Trace Guitars wants to calculate its DSI for the previous year. The store's average inventory for the period was ₹50,000 and the cost of goods sold was ₹1,50,000. The calculation for DSI is:
50,000 / 1,50,000 x 365 = 121.66
The result is 121.66. This indicates that it took Trace Guitars 121.66 days to turn its stock into sales. The DSI is high here because the products are high-cost and customers may not buy them frequently.
Example of DSI at a grocery store
New Mart wants to calculate its DSI for the past 12 months. The average inventory in that period was ₹20,000 and the cost of goods sold was ₹1,50,000. The calculation for its DSI is:
20,000 / 1,50,000 x 365 = 48.66
The DSI for New Mart for the previous year is 48.66. This indicates that it took 48.66 days for New Mart to turn its stock into sales. It is lower than the DSI of Trace Guitars because it sells perishable and low-cost goods.
Example of DSI at a furniture store
Shree Furnitures intend to calculate its DSI at the year-end before it can restock its inventory. During the previous year, the store's average inventory was ₹70,000 and the cost of goods sold was ₹1,40,000. The calculation for its DSI is:
70,000 / 1,40,000 x 365 = 182.5
The store was able to turn its inventory into sales in 182.5 days. The DSI is higher than the previous two examples, but it may be a good number considering the high cost of furniture.
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