Days Sales Outstanding DSO
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- Опубликовано: 6 авг 2024
- Days Sales Outstanding or DSO is a key working capital metric. We will cover the definition of Days Sales Outstanding, go through an example of how to calculate the DSO ratio, discuss the importance of Days Sales Outstanding, and show 5 ways to analyze and improve DSO.
Days Sales Outstanding, which is sometimes called Average Collection Period, is the average number of days that customers take to pay invoices. From a cash flow perspective, we would like DSO to be as low as possible. It is important to understand that if Days Sales Outstanding goes up, then cash flow goes down. The reverse is also true: if DSO goes down, then cash flow goes up.
⏱️TIMESTAMPS⏱️
0:00 Introduction to DSO
0:21 Days Sales Outstanding definition
0:46 How to calculate DSO
1:09 DSO example
2:54 Importance of Days Sales Outstanding
3:43 Analyzing and improving DSO
5:31 DSO and business seasonality
6:18 DSO trend analysis
Why is DSO so important? Because payments from customers are a key driver in Cash From Operating Activities! The incoming cash from customers paying on time and in full is as important for a company as it is for human beings to have oxygen to breathe. If you get cash in from customers, you can pay the invoices sent by your suppliers, the salaries of your employees, the taxes you owe to the government, and the interest you owe to the bank. If you don’t get cash in from your customers, then you might temporarily stay in business by borrowing more money or selling assets to pay your bills. If there is a structural problem with getting paid by customers, a company is likely to end up going bankrupt. Days Sales Outstanding is the key metric to measure the ability to collect.
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: RUclips videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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Simple and genius , as usual!
Thank you, excellent video !
Glad you liked it!!! I think the related video on working capital management (covering DSO in the context of the cash conversion cycle) might be useful for you too: ruclips.net/video/c5iigcEppZw/видео.html
Where did you come across the term DSO? Let me know by commenting below!
We across DSO, DIO(Days Inventory Outstanding) and DPO(Days Payable Outstanding) during the calculation of working capital of a company :)
Making a data visualization report of account receivables for xyz company
It's very thoroughly explained, helpful.
Glad to hear that, Wei-Lin! Thank you for watching and commenting.
Wonderful Explanation..Thanks
Thank you for the comment! I think you will enjoy the related video about bad debt accounting ruclips.net/video/q7Whr_A4drE/видео.html and the one about working capital as well ruclips.net/video/XvHAlui-Bno/видео.html
Very well explained with examples. Thanks for sharing the valuable information 😊
My pleasure 😊 Here's a related video where DSO is discussed in the context of working capital management: ruclips.net/video/c5iigcEppZw/видео.html&pp=gAQBiAQB That playlist also includes a video on bad debt accounting.
Great explanation!!
Thank you, Kartik! The related video on bad debt accounting might also be of interest to you: ruclips.net/video/q7Whr_A4drE/видео.html
I liked the DSO Analysis and improvement
Great to hear that, Ashwin! Thank you for watching and commenting.
Thank you for both describing the formula and how to use it
You're welcome, Haylie! :-) If you are interested in DSO, then the related videos on bad debt accounting ruclips.net/video/q7Whr_A4drE/видео.html and working capital management (which includes DSO as part of the cash conversion cycle) ruclips.net/video/c5iigcEppZw/видео.html might also be of interest to you!
@@TheFinanceStoryteller Wow, thank you! I plan to watch these playlists. I appreciate your educational content.
Thanks for the kind words, Haylie! Please subscribe to the channel, and spread the word to friends and colleagues! :-)
Thank you very much for this video.
Happy to help! Have a look at my related video on working capital management ruclips.net/video/c5iigcEppZw/видео.html to put DSO into context.
Very well explained, thanks
Thanks for the kind words! Happy to help.
Very clear explanation.👍
Glad you think so! 😎
Also make video about days payables outstanding?
Hi Krishan! Good suggestion, but I don't have much to say about DPO. I do cover it on summary level in my working capital management video ruclips.net/video/c5iigcEppZw/видео.html
But on some website the denominator of this formula is -total credit sales, instead of total revenue. What's your view about it?
That's nice if you have access to the internal data of the company, but as an external analyst you usually only get total revenue from the annual report, without having a split between cash based sales and credit sales.
BEWARE OF VARIABLES AFFECTING THE CALCULATION OF DSO:
from1st- to 8th variables depend on factors unrelated to the payments, but you can take steps to eliminate or reduce the incidence
from 8th- to10th variables depend on factors unrelated to the payments, but you can NOT attend to reduce the incidence
the 11th variable is the only variable is valid to measure improvements or deteriorations in the trends payments
1st VARIABLE IMPACT OF VAT
the billing information and credit exposure that are detectable from the accounting records and / or the financial statements, but while revenue is net
of 'tax, the credit exposure includes the' VAT, the two figures are not comparable and therefore the calculation of the DSO would be wrong if you do not intervene
on he given exposure in account receivables by deducting the 'VAT (or adding VAT to sales)
enough to homogenize the two figures by removing the VAT credit exposure or by adding it to the turnover
2nd VARIABLE METHOD OF DETECTION (BACKTRACK OR MOBILE PERIOD)
the detection method used for calculating the DSO impact differently on the same result.
just keep the same method of calculation, back track, rolling year, semester Mobile, Mobile quarter.
3rd VARIABLE TERMS OF PAYMENT
if the terms of payment of all or part of the bills in issue are also changed the DSO will be modified accordingly;
Also slippage August deadline (and December too), which is often granted automatically or on request, amend the DSO
enough to detect it and take it into account
4th VARIABLE CALENDAR YEAR OR COMMERCIAL YEAR
if we consider the business year of 360 days instead of the solar year of 365 days and consequently all the months of 30 days,
using the calendar year with the DSO back track method is changed due to the daily turnover (in the formula is different if you use 30 or 31 or 28 days)
enough to detect and take into account the difference in the calculation
5th VARIABLE LEGAL, COMMERCIAL DISPUTES, INTERCOMPANY
must be included in the calculation practices to legal, commercial disputes, the intercompany?
enough to detect it and take it into account
6th VARIABLE PERIOD OF SURVEY
if we consider the exposure at the end of a quarter, for example, in February March and April, the sum of the months considered is (28 +31 +30) = 89;
if we consider another quarter, for example June July August months in the sum of the consideration is (30 +31 +31) = 92;
This structural difference between the two surveys is already of (92-89) = 3 days
enough to detect and take into account the difference in the calculation
7th VARIABLE TERMS OF PAYMENT CONDITIONS WITH END OF THE MONTH
with the condition of payment at the end of the month, actual days will be agreed will be greater if the billing date will be in early
the month compared with a billing date near the end of the month.
And, in addition, an amount which shall expire at the end of the month exactly the same day of collection shall be deemed to have expired or not expired?
enough to detect it and take it into account
8th VARIABLE RECEIVED THE BANK AND THE EFFECTS IN CIRCULATION
about a month before the deadline or even more, the RIBA (and effects i.e. draft) are removed from the account receivables to banks and sent for collection;
sometimes the effects are sent to off long ago. Proper operation .....
but we need to keep the amount in the accounts receivable as yet NOT paid and / or AT attracting risk .... not always the case for the calculation of DSO
Simply enter in the calculation also riba and currency or discount
9th VARIABLE PAYMENTS DURING THE MONTH
the detection of the DSO is generally done at the end of each month, but it is a flash relative to a given time and DO NOT take into account
if a payment was recorded at 3 or 16 or 29 of the same month of the previous month ...... 31 resulted expired and NOT paid
while 31 of the month in which the payment is done by calculating the DSO is irrelevant the date on which occurred the same payment;
31 of the month the amount paid is removed from exposure and just; improvement or deterioration in the month is NOT detected
It's not allowed any intervention
10th VARIABLE THE IMPACT OF CHANGES IN SALES IN THE CALCULATION OF DSO
the proof is a bit 'complicated and therefore postponed to an EXCEL sheet
Exemple: detection at 31/12, backtrack method, calendar year, payment terms to 60 days, turnover 100,000 / month,
payments 50% at sight, 50% after 30 days ….. DSO = 92.00 days Change only the October sales of 40,000 ….. DSO = 101.00 days
Then change only the October turnover in 140,000 …. DSO = 87.57 days
It's not allowed any intervention
11th VARIABLE
at last the only variable that the DSO should be measured as a direct result of deterioration or improvement in payments ...
I refer you to an EXCEL spreadsheet for the demonstration
It should only attend on payments!! And this depends on the credit management
CONCLUSION:
The DSO takes into account the unpaid overdue bills and invoices to expire, but ignores the invoices paid late.
DO NOT measure so its improvements and deteriorations of the period due to the action of credit management.
The measurement ALSO suffers the influence of variables that do not depend on the turnover of receivables and may lead to erroneous assessments.
I think that this is enough to NOT believe the DSO reliable for the measurement of the trend of payments
One of the fundamental limitations of the DSO (and, therefore, the turnover of receivables) derives from its dependence
from fluctuations in sales and the period required for the calculation of the daily turnover on credit. Such dependence causes that often are reported
improvements or deteriorations in the activity of collecting, even in the presence of a stable performance of payment from customers.
Sometimes, however, these measures may not indicate that the situation is changing ...
I use another method called GPS Giorni Ponderati di Scaduto in italian or WADL Weighted Average Days Late in english ...
if you are using 5-point average by quarters (3months) should you be multiplying by 90 instead of 360 ??
The formula for DSO is average accounts receivable balance (numerator) divided by 12 months revenue (denominator), times 360 days. Taking a 5-point average instead of a 2-point average of the accounts receivable balance in the numerator does not affect the rest of the calculation. If you however take a shorter period of revenue in the denominator (for example just a quarter instead of a full year), then you will have to adjust the number of days that you subsequently multiply with.
The Finance Storyteller Thanks for your answer. But looks like in your video you are using Quarter figures since your are providing 5 quarters. Did not see or heard the revenue was made of 12 months. But thanks for clarifying
@@tetocaloscojones8229 If you want to be sure, then please watch the full video again. The 5-point average calculation is clearly visually and numerically linked to the average amount of outstanding receivables (the numerator). The DSO formula at the start of the video clearly states that revenue (the denominator) is for 12 months.
Good
Thank you!
hi, what the numerator means ?
If you divide $10 million by $50 million, then you can write that as 10/50, and "10" is the numerator, while "50" is the denominator.
@@TheFinanceStoryteller Thanks for ur kindness
Is dso legit?do you have expirience?
I've a doubt, can you help me clear
Sure, just ask your question here, and I will see if I can help.
Are you sure? I disagree
I have tried to share what I have learned from experience in analyzing and improving DSO. Look forward to hearing additional or contrarian insights that you can provide.
@@TheFinanceStoryteller well. Give me your e-mail so I can send you an aggregate excel sheet where I explain why DSO is a inadequate method
Sure! You can find the e-mail address in the "About" tab of the Finance Storyteller RUclips channel.