Do you want to perfect the management of your inventory to keep costs low while being able to meet customer demand?
The Days Sales in Inventory (DSI) metric can give you insights into the efficiency of your business when it comes to managing inventory, how much cash is tied up in stored items, and how this affects your cash flow and compares to your competitors' performance.
Learn what the DSI ratio measures, how you can calculate it, what a good ratio is, and why it's important for retailers to improve their eCommerce business.
What is “days sales in inventory”?
Days sales in inventory (DSI) is a metric for those businesses that sell physical products online and/or offline. The purpose of this KPI is to measure the average number of days it takes to sell inventory, providing important information about stock management and costs derived from inventory keeping.
Days sales in inventory can also tell you the inventory turnover in days for specific products by measuring the inventory-to-sales ratio of separate SKU codes.
A high DSI can indicate that the production or ordering batches are too large for the demand or signal a problem on one or several sales channels.
High DISs can go against cash flow forecasts, reducing profitability due to storage costs and situations when a company may need to get rid of inventory because of its expiry date or shelf life.
How to calculate the “days sales in inventory” for your business
Once you know what “days sales in inventory” is and how it affects your business profitability, the next step is to calculate the DSI for your business to find out if there are any issues with overstocking or the sales process.
To calculate your days sales in inventory, follow this DSI formula:
This days sales in inventory formula will result in days in a year. Still, it’s possible to also use the days sales of inventory in another time period, such as a quarter (by multiplying by 90) or a month (multiplying by 30), for those businesses with a higher turnover or specific KPIs for shorter time frames.
A DSI calculation is fairly simple to do, but it gives a clear overview of any improvements and readjustments that need to be made in the warehouse operations of an eCommerce business.
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DSI calculation examples
1.An electronics online store reported a year-end cost of goods sold of $11 million. It listed $1.5 million of inventory on its balance sheet. If we base the calculation on a 365-day year, what would the DSI of such a company be?
Days Sales of Inventory = (Average Inventory ÷ Cost of Goods Sold) × 365
Days Sales of Inventory = 49.77
This means that they would averagely need 50 days to clear out all of their inventory
2. If a company reports a cost of goods sold $388,725 and an average inventory of 51,830, in a quarter, what would the DSI ratio of the company be?
Days Sales of Inventory = (Average Inventory ÷ Cost of Goods Sold) × 90
Days Sales of Inventory = 11.99
This company had to re-order stock every 12 days in this specific quarter. This information can be used in the future if the nature of the business is quite steady and not seasonal.
What is a good “days sales in inventory” ratio?
Once you have already calculated your average days-to-sell inventory formula, it’s time to assess how good the ratio is for your business.
For most companies, a good DSI is between 3 weeks to 2 months, depending on the product speed, the type of product, the seasonality of the industry, etc.
However, a smaller, shorter DSI ratio doesn’t always imply a more profitable and efficient company. Frequently selling off inventory can put customers’ demands in danger and have a negative impact on your store’s reputation — when orders can’t be fulfilled due to a stockout.
For example, if you are preparing for a high season of sales, a higher days sales in inventory is only a sign of what’s to come. In this case, having cash tied up in the form of inventory isn’t a bad thing, as it prevents future bottlenecks and ensures a higher probability of being able to cope with the rising expected demand.
Importance of days sales inventory for retailers
Retailers can use the DSI metric to check their inventory levels and sales speed.
In essence, this helps them know if they are overstocking or understocking, preventing holding on to inventory for too long or not being able to meet customer demand, which can lead to unfulfilled orders and customer dissatisfaction.
Days sales in inventory, when used together with other eCommerce KPIs, can be used to identify areas for improvement in a specific field of retail.
When tracked over time, retailers can have a historical record of their progress and ease the decision-making process based on hard data rather than gut feelings or information from different sources.
DSI is useful for retailers because it helps them optimize inventory levels, minimize unnecessary costs, and maximize sales revenue.
Conclusion
Days sales in inventory (DSI) is a crucial metric for eCommerce businesses and retailers as it provides key information on inventory management and costs.
Overstocking or understocking are both issues that come with consequences for either the business or the customer.
However, the days sales in inventory is a metric that is also considered by investors, as it is part of the cash conversion cycle (CCC). In the end, knowing how long it takes a company to transform inventory into cash flows is an essential factor in determining the profitability of a business.
By calculating your DSI, you can find flaws and weaknesses in your stock management system and fix and prevent issues like stockouts and angry customers, or unnecessary costs.
Depending on product turnover or seasonality, the recommended DSI ratio can be different. For this reason, it should always be compared to companies with a similar catalog and operation to yours.
With a DSI calculation, you can compare your business performance against competitors, but also find out internal weaknesses that may need a new strategy to ensure more liquidity, without damaging the buying experience. And, while DSI is valuable on its own, we encourage retailers to track it along with other eCommerce KPIs.
