Thus, it should be supplemented with an ongoing examination of the aged accounts receivable report and the collection notes of the collection staff.ĭSO can be a useful measurement for an acquirer. No matter how this measurement is used, remember that it is usually compiled from a large number of outstanding invoices, and so provides no insights into the collectability of a specific invoice. If a business is highly seasonal, a variation is to compare the measurement to the same metric for the same month in the preceding year this provides a more reasonable basis for comparison. Doing so shows any changes in the ability of the organization to collect from its customers.
#AVERAGE ACCOUNTS RECEIVABLE FORMULA HOW TO#
How to Use Days Sales OutstandingĪn effective way to use the days sales outstanding measurement is to track it on a trend line, month by month. The calculation indicates that the company requires 60.8 days to collect a typical invoice. (Accounts receivable ÷ Annual revenue) × Number of days in the year = Days sales outstanding Example of Days Sales OutstandingĪs an example of the DSO calculation, if a company has an average accounts receivable balance of $200,000 and annual sales of $1,200,000, then its DSO figure is:
+2017+Current+Assets.png "average accounts receivable formula")
The formula for days sales outstanding is to divide accounts receivable by the annual revenue figure and then multiply the result by the number of days in the year. Conversely, a days sales outstanding figure that is very close to the payment terms granted probably indicates that a company's credit policy is too tight. Generally, a figure of 25% more than the standard terms allowed may represent an opportunity for improvement. There is not an absolute number of days sales outstanding that represents excellent or poor accounts receivable management, since the figure varies considerably by industry and the underlying payment terms. The measurement can be used internally to monitor the approximate amount of cash invested in receivables. When measured at the individual customer level, it can indicate when a customer is having cash flow troubles, since the customer will attempt to stretch out the amount of time before it pays invoices. It is used to determine the effectiveness of a company's credit and collection efforts in allowing credit to customers, as well as its ability to collect from them. Days sales outstanding (DSO) is the average number of days that receivables remain outstanding before they are collected.
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