Days Sales in Inventory: What It Is, Its Formula, & Calculation

What Is Days Sales in Inventory (DSI)?

Days Sales in Inventory (DSI) is a financial metric that measures the average number of days a company takes to sell its entire inventory during a specific period. It provides insight into how efficiently a company manages its inventory and how quickly it can convert its stock into sales.

Importance of Days Sales in Inventory

Days Sales in Inventory (DSI) is crucial for several reasons:

• Inventory Management: It helps businesses assess how well they manage their inventory levels. Efficient inventory management ensures that a company has enough stock to meet customer demand without overstocking, which can lead to higher holding costs.
• Cash Flow: Companies can better manage their cash flow by understanding how quickly inventory is sold. Faster inventory turnover means quicker cash recovery from sales.
• Operational Efficiency: DSI provides insight into operational efficiency and can highlight areas where processes can be improved to boost sales or reduce inventory levels.

Formula for Days Sales in Inventory

The formula to calculate Days Sales in Inventory (DSI) is:

Where:

• Average Inventory is the average amount of inventory held over the period.
• Cost of Goods Sold (COGS) is the total cost of goods sold during the period.

This formula helps businesses determine how long it takes, on average, to sell their inventory.

How to Calculate Days Sales in Inventory?

To calculate DSI, start by identifying the inventory value from the balance sheet, then determine the Cost of Goods Sold (COGS) from the income statement. After calculating the average inventory, you can compute the DSI.

Here are detailed steps on how to calculate DSI:

1. Identify the inventory value

The first step is to determine the inventory value, which is found on the balance sheet. This includes:

• Raw Materials: The basic materials that are used to produce goods.
• Work-in-Progress (WIP): Items that are in the process of being manufactured but are not yet completed.
• Finished Goods: Products that are ready for sale.

2. Determine the cost of goods sold (COGS)

Next, you need to find the Cost of Goods Sold (COGS) from the income statement. COGS represents the direct costs attributable to the production of the goods sold by the company.

3. Calculate average inventory

Then, calculate the average inventory, which is often used for a more accurate DSI calculation, especially if inventory levels fluctuate significantly throughout the year. It can be calculated as:

4. Calculate DSI

Finally, calculate the DSI using the formula :

DSI = (Average Inventory) × 365

COGS

This formula converts the inventory turnover ratio into days by multiplying by 365 (the number of days in a year.

Days Sales in Inventory Calculation Example

Now, let’s calculate DSI and try to understand it using an example.

Suppose Company XYZ has the following data for the year 2024:

• Beginning Inventory: $50,000
• Ending Inventory: $70,000
• Cost of Goods Sold: $300,000

First, calculate the Average Inventory:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

= (50,000 + 70,000) / 2 

= 60,000 

Next, use the DSI formula:

DSI = 60,000 times 365 

300,000

= 0.2 times 365

= 73 days

 

This implies that XYZ takes approximately 73 days to sell its average inventory.

How to Interpret Days Sales Inventory Ratio?

Interpreting the Days Sales in Inventory (DSI) ratio is crucial for assessing a company’s inventory management effectiveness and overall operational efficiency. Let’s explore the details of how to interpret DSI, starting with some key considerations that provide a foundational understanding.

Key Considerations in DSI Interpretation

Industry Benchmarks: DSI values can vary widely between industries. Comparing your DSI against industry benchmarks helps determine whether your inventory management is competitive. For example, retail businesses may have different DSI benchmarks than manufacturing companies.

Seasonality: Businesses with seasonal sales patterns may experience significant fluctuations in inventory levels. To avoid misinterpretation, it’s crucial to consider these seasonal variations when analyzing DSI. For instance, a high DSI during off-peak seasons might be normal, while a low DSI during peak seasons could indicate effective inventory turnover.

Inventory Turnover Ratio: DSI is closely related to the inventory turnover ratio, which measures how often inventory is sold and replaced over a period. A high turnover ratio typically leads to a lower DSI and vice versa. Understanding this relationship can provide additional context for interpreting DSI and evaluating inventory performance.

High DSI

A high DSI indicates that it takes longer for the company to sell its inventory. This could be due to several factors:

• Overstocking: An excessively high DSI might suggest that the company is holding more inventory than necessary, leading to overstocking. This excess inventory can tie up capital and increase storage costs.
• Slow-moving Inventory: High DSI can also point to slow-moving inventory or products not selling as quickly as expected. This situation may necessitate discounting or promotions to clear out older stock.
• Declining Sales: A longer DSI might reflect a decline in sales or market demand, requiring a reassessment of the company’s sales and marketing strategies or product offerings.

High DSI can result in higher holding costs and potential obsolescence of inventory, which can impact profitability. Therefore, businesses need to analyze the causes and address them through better inventory management practices or strategic adjustments.

Low DSI

A low DSI indicates that the company is selling its inventory quickly. This generally suggests:

• Efficient Inventory Management: A low DSI is often a sign of effective inventory management, where the company maintains optimal stock levels and efficiently meets customer demand.
• Strong Sales: Quick inventory turnover usually correlates with strong sales performance and high customer demand for the company’s products.

However, an extremely low DSI could pose risks:

• Stockouts: If the DSI is too low, it might indicate that the company is at risk of stockouts or insufficient inventory levels, which could lead to missed sales opportunities and customer dissatisfaction.
• Inadequate Inventory Levels: Constantly low inventory levels might also impact the company’s ability to fulfill larger orders or adapt to unexpected surges in demand.

By carefully analyzing DSI and considering these factors, companies can gain valuable insights into their inventory management practices. This understanding enables businesses to make informed decisions, optimize inventory levels, and improve overall operational efficiency.

How Can HighRadius Help?

HighRadius provides a powerful, cloud-based Order to Cash(O2C) solution designed to automate and streamline your financial operations. Our comprehensive suite includes Collections Management, Cash Application, Deductions Management, Electronic Invoicing, Credit Cloud, and dotOne Analytics, enhancing the efficiency of your team and optimizing workflows. These solutions help accelerate your sales cycle, allowing sales personnel to onboard customers faster and process purchase orders more efficiently, thereby reducing Days Sales in Inventory (DSI). 

Our solutions help businesses achieve tangible results:

• Collections management: Our AI-powered collections software helps prioritize worklists for your top 20% of customers and automates collections for 80% of long-tail customers. Experience a 20% reduction in past-due accounts and a 30% increase in collector productivity.
• Credit management: Gain real-time credit visibility and manage global portfolios with our AI-based credit solution. See a 20% reduction in bad debt and a 90% improvement in credit application approval time.
• Electronic invoicing: Enhance customer experience with a self-serve portal for buyers and multi-channel invoice delivery. Increase billing analyst productivity by 20%.

HighRadius seamlessly integrates with leading ERPs like SAP and Oracle, ensuring a smooth and comprehensive O2C process. This integration allows businesses to leverage existing systems and data, significantly enhancing overall efficiency and accuracy.

FAQs

1) What is a good days sales in inventory ratio?

A good Days Sales in Inventory ratio varies by industry. Generally, a lower DSI is preferred as it indicates efficient inventory management and quicker turnover. However, it’s crucial to compare your DSI against industry benchmarks to find what constitutes a good ratio for your specific sector.

2) What is the equation for DSI?

The equation or formula for calculating Days Sales in Inventory is dividing the average inventory by the cost of goods sold and then multiplying the result by 365. This equation measures the average number of days it takes for a company to turn its inventory into sales.

3) How to improve days sales in inventory?

To improve DSI, understand where the inventory items are in their product life cycle to make informed stocking decisions. Enhance demand forecasting accuracy to better align inventory levels with customer demand. Optimize supply chain efficiency to ensure timely replenishment and reduce lead times.