Days' sales in inventory, also known as days inventory outstanding, indicates on average how many days it takes a company to sell through the merchandise currently sitting in its inventory. It converts the inventory turnover ratio into an intuitive day-count figure, answering a very practical question: if the business stopped buying any more stock today, roughly how long could it keep selling from what it already has on hand?
How the measure is calculated
The standard calculation divides 365 by the inventory turnover ratio, or equivalently divides average inventory by cost of goods sold and multiplies by 365. A company with an inventory turnover of 8 has days' sales in inventory of roughly 45.6 days, meaning its typical unit of inventory sits for about that long, on average, before being sold.
Why the measure varies enormously by industry
A grocery retailer selling perishable goods might show days' sales in inventory in the single digits, since fresh stock needs to move quickly, while a luxury watchmaker, an aircraft parts supplier, or a wine merchant holding stock to mature can show figures well into the hundreds of days without that being any sign of poor management, since those businesses are expected to hold inventory for extended periods as part of their normal operating model. Comparing this figure meaningfully requires comparing against close industry peers rather than against any single universal benchmark.
What a rising or falling trend signals
A steadily rising days' sales in inventory figure can signal weakening sales, overstocking, or a buildup of slow-moving or obsolete items that are becoming harder to sell, and may eventually require a markdown or write-down to net realizable value. A falling figure generally signals improving sales relative to stock levels or more disciplined inventory management, though a figure that falls too far can also indicate the business is understocked and at risk of losing sales to stockouts, so the goal is usually a reasonably stable, industry-appropriate figure rather than one that is simply as low as possible.
Days' sales in inventory and the cash conversion cycle
This measure is one of the three components, alongside days' sales in accounts receivable and days payable outstanding, that make up a business's cash conversion cycle, the total time it takes to turn cash spent on inventory back into cash collected from customers. Reducing days' sales in inventory, without sacrificing sales or risking stockouts, is one of the most direct ways a business can free up cash without needing to raise new financing, since every day of inventory sitting unsold represents cash tied up that could otherwise be deployed elsewhere.
A simple worked example
A company with $600,000 of average inventory and $3.6 million of annual cost of goods sold has an inventory turnover of 6 and days’ sales in inventory of roughly 60.8 days, found by dividing 365 by the turnover figure. A furniture retailer seeing that number creep up from 60 to 90 days over a year, without a corresponding change in its buying patterns, would reasonably investigate whether demand is softening or whether specific slow-moving items are quietly accumulating in its warehouse.