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Days' Sales Outstanding Ratio


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Examples

Example 1:
Calculate DSO for Merkley Surveys, when:

  • Net credit sales during the month = $644,790
  • Average accounts receivable during the month = $43,300
  • Days in the month = 30
  • DSO (days) = (Accounts receivable ÷ credit sales) × number of days = ($43,300 ÷ $644,790) x 30 = 0.0672 x 30 = 2 days

Example 2:
Here is DSO trend data for Merkley Surveys for a 6-month period. Is the average collection period for Merkley improving or deteriorating?

MonthDSO
Jan2.60
Feb2.63
Mar3.0
Apr3.2
May3.4
Jun3.8

It’s deteriorating, because the average collection period is increasing (it’s taking longer for customers to pay their bills).

Overview

Days' sales outstanding ratio (also called average collection period or days' sales in receivables) is used to measure the average number of days it takes for customers of a business to pay their bills. It is an activity ratio, one of several ways to measure how efficiently a company collects what others owe them. The ratio also shows the relationship between the total value of outstanding receivables and credit account sales made during a given period.

The days’ sales outstanding value tends to increase as a company becomes less risk averse. A higher ratio value might indicate ineffective screening of applicants for credit. An increase in DSO can indicate cash flow problems.

Analysis

Because it is more profitable to convert sales into cash quickly, a lower ratio value is more attractive to analysts than a higher value. However, it is more meaningful for businesses to monitor their receivables and credit metrics for several weeks or months, calculate ratio values and monitor the resulting trends. Any significant increase in ratio value can indicate inefficient credit sales collection. For factoring companies that offer debt collection as a support service, a higher ratio value might indicate a potential sales opportunity.

Higher DSO values might also indicate that a company’s customers have their own credit problems, or it collects debts ineffectively. And, low ratio values might indicate credit policies that are too strict, which can hamper sales.

Formula

DSO (days) = Accounts Receivable ($) × Number of Days Credit Sales ($)