Days Sales Outstanding

Using the formulated metrics of Advanced Collections you can calculate the Days Sales Outstanding (DSO).

Let's understand Days Sales Outstanding using an example.

Here we have 5 metrics related to Days Sales Outstanding. We will look at few formulas with sample calculations.

Scenario

As a Collections Manager you need to understand the Days Sales Outstanding metrics and use the analytics to make decisions. Say the date of the calculation is October 1, 2011. This table displays the receivables data used for each of the calculations.

Date of Invoice	Aging Bucket	Dollars in Bucket	Credit Sales in Period
9/28/11	Current	3,000 USD	5,000 USD
8/28/11	1-30 days past due	3,000 USD	6,000 USD
7/28/11	31-60 days past due	2,000 USD	5,000 USD
Total Open Receivables	NA	8,000 USD	16,000 USD

Calculating Various Days Sales Outstanding (DSO)

Let's look at some examples with formulas to calculate each of the Days Sales Outstanding (DSO) metrics:

DSO

In this example you can see, how to calculate the (aggregate) average time, in days, for which the receivables are outstanding. This will help you to determine if a change in receivables is due to a change in sales, selling terms, or other factors.

You can compare the days' sales outstanding with the company's credit terms to understand how efficiently your company manages its receivables.

If DSO = Ending Balance * N / Credit Sales, where N = Number of days in the period.

then as per the data shown in the table, the 3rd Quarter DSO = ($8,000 / $16,000) x 91 = 45.5 days DSO

True DSO

You can calculate DSO using an average balance over the period rather than Ending Balance snapshot.

Number of days from invoice date to reporting date x (invoice amount/net credit sales for the month in which the sale occurred) = True DSO per invoice

The sum of True DSO for all open invoices = True DSO per total accounts receivable. True DSO = (Beginning Balance + Ending Balance / 2) * N / Credit Sales. For example:

September Invoice = ($3,000 / $5,000) x 2 = 1.2 days

August Invoice = ($3,000 / $6,000) x 33 = 16.5 days

July Invoice = ($2,000 / $5,000) x 64 = 25.6 days

Sum of True DSO for all open invoices = True DSO per total accounts receivable

1.2 + 16.5 + 25.6 = 43.3 True DSO

Best Possible DSO

In this example you can see, how to calculate the best possible level of receivables. You can use Best Possible DSO only at the current receivables to calculate the best length of time you can turn over those receivables.

Best Possible DSO = Current Receivables * N / Credit Sales

For example, the calculation based on the earlier data: ($3,000 / $16,000) x 91 = 17 days Best Possible DSO.

Sales Weighted DSO

In this example you can see, how to calculate the (aggregate) average time, in days, for which the receivables are outstanding weighted by the age of the receivables.

Sales Weighted DSO = ((Current Age Category / Credit Sales of Current Period) + (1 to 30 Day Age Category / Credit Sales of Prior Period) + (31 to 60 Day Age Category / Credit Sales of 2nd Prior Period) + (61 to 90 Day Age Category / Credit Sales of 3rd Prior Period) + (91 to 120 Day Age Category / Credit Sales of 4th Prior Period) ) x 30

(($3,000 / $5,000) + ($3000 / $5,000) + ($2,000 / $6,000)) x 30 = (0.6 + 0.5 + 0.4) x 30 = 45 days Sales Weighted DSO.

Average Days Delinquent

In this example you can see, how to calculate the average time from the invoice due date to the paid date, or the average days invoices are past due in days.

Average Days Delinquent = Standard DSO - Best Possible DSO.

45.5 DSO - 17 BPDSO = 28.5 average days delinquent