Days Sales of Inventory - DSI

You own a business. You want to get a sense for the number of times your company turns over its inventory on an annual basis. It’s important to keep track of your inventory ratio for purposes of budgeting, understanding your storage needs, and to track just how many products you are buying from your wholesaler. Like...if you have tons of capital tied up in inventory that is just sitting there on the shelves, it's a problem. Or at least inefficient.

To get this DSOI number, take the number of days in the year or the numbers in the k business calendar (365 or 360). Then divide that number by your firm’s inventory turnover ratio (which is the Cost of Goods Sold in a year divided by the average inventory level during that same year).

Example:

Your Cost of Goods Sold was $3 million for the year. The average cost of inventory was $500,000. This means that your inventory turnover ratio was 6 ($3 million / $500,000).

Given that the company had an inventory ratio of 6, we can determine the average numbers of days that it took to sell the average amount of inventory.

So we divide 360 days by the inventory ratio of 6, and we find that the company had on average 60 days of inventory available.