Days Inventory Outstanding (DIO)

DIO for product businesses

DIO = (Average Inventory / Cost of Goods Sold) × Number of Days. Lower DIO means inventory turns faster and ties up less cash. A grocery chain might run DIO around 30 days; a luxury retailer with deep stockouts might run 90-120 days.

Reducing DIO usually means better demand forecasting, smaller safer stocks, and tighter SKU rationalization. Each 10 days of DIO reduction on \$1M of annual COGS releases roughly \$27,000 of cash.

The service-business equivalent: work-in-progress

Service firms rarely hold physical inventory but often carry significant work-in-progress (WIP) — hours delivered, milestones reached, or projects underway that haven't been invoiced yet. WIP is functionally identical to inventory: cash you've already spent (on payroll, contractors) that you haven't yet recovered.

Best-in-class service firms invoice weekly or at every milestone rather than monthly or at project end. Invoicing twice as often roughly halves the WIP balance, releasing cash even before customers pay any faster.

DIO for inventory-light service businesses

Pure service businesses don't carry physical inventory but almost always carry work-in-progress (WIP) — labor delivered but not yet invoiced — which behaves identically to inventory from a cash perspective. WIP days = (WIP balance × 365) ÷ annual cost of services. An agency with $400k of WIP and $4M of cost-of-services is carrying 36 days of WIP, just as cash-tied-up as a manufacturer with 36 days of finished goods.

The two main drivers of WIP are billing cadence and project structure. Monthly billing creates up to 30 days of WIP automatically; switching to bi-weekly or upon-milestone billing typically halves it. Fixed-fee projects with payments at completion accumulate enormous WIP balances; switching the same projects to milestone billing (33% deposit, 33% mid-point, 34% delivery) usually eliminates the problem.

Beware the 'almost done' WIP balance: hours that are technically billable but the team hasn't written them up because the project is still open. This is one of the largest sources of revenue leakage in service businesses. A weekly WIP review by project manager — clear out anything older than 14 days — typically recovers 5-10% of billable hours that would otherwise quietly disappear.

When evaluating an acquisition target with material inventory or WIP, request an inventory aging by SKU or project. The summary balance can hide enormous quality problems — slow-moving SKUs, abandoned WIP, or rework liability — that affect both the purchase price and the working-capital adjustment at closing. A clean aging is a strong signal of operational discipline.