Days Sales Outstanding

The days sales outstanding ratio shows the average number of days your customers are taking to pay you. To calculate the ratio divide the average accounts receivable by the daily credit sales. Additionally the ratio is sometimes abbreviated to DSO or referred to as days sales in accounts receivable.

Days Sales Outstanding Formula

• 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. For the purpose of 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). Consequently to avoid distortion of the ratio, if there are significant changes in the balance sheet amount over the accounting period then use an average of the beginning and ending balance sheet amounts.

Average = (Beginning balance + Ending balance) / 2

DSO Calculation

Days Sales Outstanding Example 1

To illustrate suppose a business has annual sales of 200,000, beginning accounts receivable of 20,000, and ending accounts receivable of 30,000. In this instance the calculation of the days sales outstanding ratio is 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

When using sales for a different period then replace the 365 with the days in the management accounting period.

To illustrate suppose monthly (30 days) management accounts show sales 18,000, beginning accounts receivable 19,000, and ending accounts receivable 22,000. In this instance the calculation of the  day sales outstanding ratio is 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 DSO 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 DSO 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 DSO should be the same as your Terms of Trade with customers.
• A cash business should have a much lower DSO figure than a non-cash business.
• Typical ranges for DSO for a non-cash business would be 30-60 days.