The days sales outstanding ratio shows the average number of days your customers are taking to pay you. It is calculated by dividing average accounts receivable by daily credit sales. It is sometimes abbreviated to DSO or referred to as days in accounts receivable.
Days Sales Outstanding Formula
The days sales outstanding formula is as follows:
- Accounts receivable is shown in the balance sheet under the heading of current assets.
- Credit sales or revenue is found in the income statement, and is the amount of sales made to account customers. When making comparisons to other businesses, if the value of credit sales is not available, use the figure for total sales.
Note on averaging of balance sheet items
This ratio includes an income statement amount (sales) which is for a period of time (usually a year), and a balance sheet amount (accounts receivable) which is given at a particular point in time (usually the year end). To avoid distortion of the ratio, if there are significant changes in the balance sheet amount over the accounting period an average of the beginning and ending balance sheet amounts can be used.
Average = (Beginning balance + Ending balance) / 2
Days Sales Outstanding Calculation
Days Sales Outstanding Example 1
As an example, suppose a business has annual sales of 200,000, beginning accounts receivable of 20,000, and ending accounts receivable of 30,000 then the days sales outstanding ratio is calculated as follows:
Average accounts receivable = (20,000 + 30,000) / 2 = 25,000 Days sales outstanding = Average accounts receivable / (Sales / 365) Days sales outstanding = 25,000 / (200,000 / 365) Days sales outstanding = 45.63 days
It takes the business on average 45.63 days to collect accounts receivable from customers.
Days Sales Outstanding Example 2
If you are using sales for a different period then replace the 365 with the number of days in the management accounting period.
For example, if using monthly (30 days) management accounts showing monthly sales 18,000, beginning accounts receivable 19,000, and ending accounts receivable is 22,000 then the day sales outstanding ratio is calculated as follows:
Average accounts receivable = (19,000 + 22,000) / 2 = 20,500 Days sales outstanding = Average accounts receivable / (Revenue / 30) Days sales outstanding = 20,500 / (18,000 / 30) Days sales outstanding = 34.17 days
What does the Days Sales Outstanding Ratio Show?
If your days sales outstanding are increasing beyond your normal trading terms it indicates that the business is not collecting accounts receivable from customers as efficiently as it should be, or perhaps terms are being extended to boost sales. For example if your normal terms are 30 days and your days sales outstanding ratio is 60 days the business on average is taking twice as long to collect accounts receivable as it should do.
Any upward trend in the days sales outstanding ratio means that an increasing amount of cash (possibly from debt funding) is needed to finance the business, this can be a major problem for an expanding businesses.
Useful Tips for Using Days Sales Outstanding
- The days sales outstanding should be the same as your Terms of Trade with customers.
- A cash business should have a much lower days sales outstanding figure than a non-cash business.
- Typical ranges for days sales outstanding for a non-cash business would be 30-60 days.