DAYS SALES OUTSTANDING:
DEFINITIONS AND CALCULATIONS
DSO = Days sales outstanding - measures the time it takes a company to collect account receivables from credit sales. It provides a good understanding of the effectiveness of the account receivable collection policies and staff in charge of executing on those policies.
The
formula to calculate Day
Sales Outstanding is:
(Total
Receivables/Total Credit
Sales) x Number of Days
in the measurement
period = Day Sales
Outstanding
Example
of DSO:
Total Receivables =
$5,000,000.00
Total Credit Sales =
$10,000,000.00
Number of days in period
= 90
(5,000,000.00/10,000,000.00)
X 90 = 45 days (DSO)
In this example it takes
45 days (on the average)
for the company to
collect its account
receivables.
It’s great to calculate day sales outstanding but the question is: What does the above number mean? The answer is there needs to be a “best practice” goal and that is what “Best Possible Day Sale Outstanding” is. This calculation looks only at current account receivables (current being what your policy states). Most companies like to have their account receivable policy at net-30 days.
The formula for Best
Possible Day Sale
Outstanding is:
(Current
Receivables/Total Credit
Sales) X Number of Days
= Best Possible DSO
Example of
Best Possible DSO:
Current Receivables =
$2,500,000.00
Total Credit Sales =
$10,000,000.00
Number of days in period
= 90
(2,500,000.00/10,000,000.00)
X 90 = 22.5 days (best
possible DSO)
Best Possible
DSO yields
insight into
delinquencies since it
uses only the
current portion
of receivables. As a
measurement, the closer
the regular DSO is to
the Best Possible DSO,
the closer the
receivables are to the
optimal level. It helps
to distinguish between
length of selling terms
and delinquency.