Days sales outstanding is an activity ratio and is used to know the average number of days a company takes to collect the payments from its customers for sales made to them on credit terms. This is also called day’s sales in receivables or average collection period and denoted by DSO. Using this ratio, you can assess the performance of your recovery department.
Days Sales Outstanding Ratio Formula
Days Sales Outstanding Ratio = (Average Accounts Receivables / Credit Sales) x 365
Alternatively, we may use the following formula to calculate DSO:
Average collection Period = 365 / Accounts Receivable Turnover
Example
Following information is available from the balance sheet of Delta:
Accounts Receivable 1st Jan, 2015 = $20,000
Accounts Receivable 31st Dec 2015 = $25,000
Credit sales for the year 2015 = $320,000
Required: Calculate Days sales outstanding/ average collection period.
Solution
Average account receivable = (Receivable 1st Jan, 2015 + Accounts Receivable 31st Dec 2015) / 2
Average account receivable = (20,000 + 25,000) / 2 = $22,500
Days Sales Outstanding Ratio = (Average Accounts Receivables / Credit Sales) x 365
Days Sales Outstanding Ratio = (22,500 / 320,000) x 365 = 25.6 days