What is Days Inventory Outstanding?
DIO measures how long your inventory sits in the warehouse before being sold. Lower DIO means faster inventory turns, less cash tied up in stock, and reduced risk of obsolescence.
Why DIO Matters for Founders
For ecommerce founders, DIO is a critical working capital metric. Every day inventory sits unsold is a day your cash is trapped. High DIO often signals overstocking, slow-moving products, or demand forecasting problems.
For SaaS companies, DIO is typically not applicable since you do not hold physical inventory. However, if you sell hardware or physical goods alongside software, this metric becomes relevant.
Optimizing DIO
Tactics to reduce DIO include better demand forecasting, just-in-time inventory management, dropshipping slow movers, and aggressive liquidation of aging stock.
Formula
DIO = (Average Inventory ÷ Cost of Goods Sold) × 365
Example
Your ecommerce company has:
- Average Inventory: $300,000
- Annual COGS: $1,800,000
DIO = ($300,000 ÷ $1,800,000) × 365 = 60.8 days
On average, products sit in your warehouse for 61 days before selling. If competitors operate at 45 days, you have a working capital disadvantage to address.