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Inventory Management, Part I
This blog is part of the High-Performing Company Series, on Inventory Management. To read Part II, click here.
Inventory management plays a critical role in your company’s financial performance and cash flow. Inefficient processes can trap cash in unsold inventory, create excess storage costs, and hinder growth opportunities.
By focusing on key inventory financial ratios, small to medium-sized businesses can identify inefficiencies, improve turnover, and maximize profitability.
In this two-part blog series, we’ll break down the four essential inventory management ratios you need to know. Part I focuses on:
Daily Inventory Outstanding (DIO)
Inventory to Sales (IVS)
These ratios work together to provide actionable insights, helping you optimize inventory levels, streamline operations, and free up trapped cash.
DIO measures how many days, on average, it takes your company to sell an inventory item during a specific period (e.g., monthly, quarterly, or annually).
How many days on average, within a single period, does it take your business sell its inventory?
Unsold inventory ties up cash that could be used for other operational needs. If inventory sits in storage too long, it increases carrying costs and may even require your company to borrow money to cover daily operations. Tracking your DIO allows you to identify inefficiencies and take steps to reduce the time inventory sits idle.
If your company has a DIO score of 48 days but the calculated goal score for your industry is 15 days, this 33-day gap could trap$125,689 in inventory. With the right financial ratio technology, you can take actionable steps to reduce this score and free up cash flow.
Our financial ratios helps you:
Lowering your DIO improves cash flow by reducing the time inventory sits idle and minimizing associated costs.
The Inventory to Sales Ratio (IVS) measures the amount of inventory your company holds relative to the number of sales made during a given period.
How much of your company’s capital is tied up in inventory compared to how much sales it will generate over a certain period of time.
A low IVS ratio indicates that your inventory is moving quickly, which is a positive sign of efficiency and strong sales performance. Conversely, a high or rising IVS ratio may signal excess inventory and inefficiencies in stock management.
A ratio between 5 to 10 is generally considered healthy, reflecting proportional inventory levels and robust sales. Tracking this ratio over time (e.g., 3-5 years) provides valuable insight into the direction of your inventory performance.
Our financial ratios helps you:
Optimizing your IVS helps reduce inventory holding costs and ensures that your stock aligns with sales performance.
DIO and IVS are critical indicators of your company’s inventory management efficiency. While DIO focuses on the time it takes to sell inventory, IVS reveals how well your inventory aligns with sales. Together, these ratios provide a comprehensive view of how efficiently your business converts inventory into cash, helping you make data-driven decisions to improve performance.
Becoming a high-performing company in inventory management requires understanding and optimizing your DIO and IVS ratios.
In Part II of this series, we’ll explore Inventory Turnover (IVT) and the Cash Conversion Cycle (CCC) to further enhance your inventory strategy.
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