Days Sales of Inventory (DSI) is a measure used to determine the average number of days it takes for your business to sell its products or inventory.
Generally, a lower average number of days is better for your business. This means you have less inventory on hand, resulting in lower overhead costs, and indicates that your sales are strong.
There are two ways to calculate DSI, and the one you choose will depend on your company’s accounting practices.
In the first version, you calculate the average inventory based on the inventory at the end of the accounting period, such as the end of the fiscal year.
In the second version, you consider both the end-date and start-date inventory values to find the average. This gives you the DSI value for that specific time period.
You can use the following formula:
DSI = (Average Inventory/Cost of Goods Sold) x 365
Note that Cost of Goods Sold (COGS) includes labour, materials, and other expenses directly related to manufacturing your products.
Here’s an example:
Let’s say that you have a total inventory value of R100,000 and your COGS for a fiscal year was R800,000. To calculate the DSI, simply plug in these numbers into the formula provided:
DSI = (100,000/800,000) x 365 = 45.6 days
You need to calculate your DSI because it gives you valuable insight into your inventory management efficiency and your business’s overall performance. Since the DSI value discloses how quickly you sell your inventory, it will help you understand the average time it takes to clear your inventory through sales.
A low DSI number would suggest that you are selling your inventory quickly, which, as mentioned, is generally a good sign for revenue generation.
Alternatively, a high DSI number indicates that your inventory turnover is slower. This could be because you are selling products with a long shelf life, or you are facing some difficulties in moving your inventory.
It’s best to calculate your DSI regularly – preferably at the end of each accounting period, whether monthly, quarterly, or annually. This will help you consistently track inventory efficiency and make timely adjustments as needed.
When you regularly monitor your DSI, you will be in a great position to spot trends, address issues as they come up, and adapt your inventory management to meet changing market demands.
Here are some software programmes that include features for tracking inventory levels, which can help you calculate your DSI:
The point we want to drive home is that DSI is a valuable tool for measuring how quickly your inventory sells and regularly monitoring it will give you important insights into your business’s operational efficiency and flexibility.
