When you are selling goods in large quantities, you are utilizing the inventory and not wasting it. However, low sales reflect wastage of goods, inventory turning obsolete, or damaged in the warehouse. Therefore, it is essential to keep a note of all the inventory movement and its relationship to sales.
An ideal way to do this is to track the Day Sales Inventory (DSI) as a business metric.
In this all-in-one article, you will learn everything about Days Sales in Inventory- From what Days Sales in Inventory is, what it means for your company, to how to calculate it.
"Make inventory a common enemy for your company" - Dave Waters
What is Days Sales in Inventory?
Days Sales in Inventory (DSI) aka, Average Age of Inventory, demonstrates the time needed for an organization to turn its stock into deals.
Organizations that take fewer days to sell the inventory show that the organization is more proficient at selling its stock. The DSI figure also helps in determining the overall performance of the company. DSI trends can be indicators of whether a company is improving its sales or falling behind.
Decreasing Day Sales in Inventory (DSI) numbers generally mean the company is moving in the right direction.
Why is DSI Important for Your Company?
If you are a company that sells goods more than services, DSI makes a significant marker for you and your investors. DSI reflects the liquidity of your business. So, your investors who always want to know whether or not your company is performing well can easily refer to the DSI report.
Secondly, when the maintenance cost, rent, security cost, and other expenses of holding inventory are not managed efficiently, it directly impacts your profit margin. Hence, DSI value helps you to study the movement of the goods in the supply chain. It helps in the expense planning of storage and maintenance costs of your holding inventory.
Another way in which Day Sales Inventory helps a company is by providing indicators to restock at the right time.
Now that you have understood what DSI holds for you, we have listed a few things to remember before you learn how to calculate DSI.
Things to Remember in DSI
- DSI differs enormously among companies based on factors such as the business model and the type of product. Every company has a different commodity to offer and practices a business model that aligns with its aims and objectives. So when you make a critical analysis of the DSI value in the market, compare it with the companies in the same sector as you.
- Another point to remember is, organizations in the tech sector, furniture, automobile sector, and many more can bear to clutch their inventories for long. However, those in the business of perishable goods like food items cannot hold inventory for long.
- Every organization should try to find a balance between ideal stock levels and market demand.
Now that we know what DSI is, let’s get to the math.
How to Calculate Day Sales Inventory (DSI)?
DSI calculation has a simple formula.
Formula of DSI
DSI = (Average Inventory / Cost of Goods Sold) x Number of Days
Let us see what the individual components in DSI are.
What is Average Inventory and How to Calculate it?
Average inventory is the mean value of a company’s inventory over a specific period of time.
The average inventory values can be used as a point for comparison when considering the overall sales volume, allowing a business to track inventory losses that may have occurred due to damaged goods, theft, and so on. It also accounts for any perishable inventory that has expired. Average inventory is also used in calculating Inventory Turnover Ratio.
Formula for calculating Average Inventory:
Average Inventory = (Current Inventory + Previous Inventory) / Time-Period
What is COGS?
Cost of Goods Sold (COGS) also known as cost of sales refers to the expenses of manufacturing the products sold by an organization. It includes the expense of the raw materials and labor costs. It excludes any indirect expenses, such as sales for cost and distribution cost. Head over to our article on Cost of Goods to Sold to learn more about it.
Number of days
When calculating a DSI you can either take, 365 days for a year and 90 days for a quarter. Sometimes, companies also consider 360 days for calculation.
While the numerator reflects the value of the stock, the denominator shows the everyday cost spent by the organization for the manufacturing of goods. The net factor tells the number of days taken by an organization to clear its inventory.
Note: A business should be calculating and tracking DSI and observe the trend over time. A decreasing DSI means you are headed in the right direction.
A recent study suggests that organizations with high inventory turnover ratios and low DSIs help you stay afloat in the market. It enables you to stay ahead of your competitors in the market. Your aim should be to increase the ITR and decrease DSIs over time. Deskera helps you with just that.
With advanced inventory management and inventory control features, Deskera helps you drive DSI down.
We hope this article helped you understand what Day Sales Inventory is, its importance, few things to remember about DSI, and how to calculate it.