Reviewing Accounts Receivable For Days Sales Outstanding (DSO)
A good way to review your accounts receivable to ensure that your collection days are in correlation with your standard payment terms days for a specific period is to calculate the average days sales outstanding (DSO).
To do so, divide the total of the most recent twelve months of credit (on account) sales by 365 days to arrive at the credit sales per day. Then take the beginning of the period receivables and add that to the end of the period receivables. Divide that figure by two to get your average receivables. Finally, divide the average receivables by the credit sales per day to arrive at the DSO.
As an example, Johnny’s Plumbing Supply is a small company and Johnny wants to know if his customers are paying in accordance with the company’s standard payment terms of Net 30 days. It’s June 30th and his receivables balance is $56,000. At the beginning of June, his receivables balance was $54,000. His sales from July 1st last year until now are $547,500.
$547,500 / 365 days = $1,500 per day
$54,000 + $56,000 = $110,000 / 2 = $55,000 average
$55,000 / $1,500 = 36.6 DSO
Tracking DSO in a trend line allows management to spot any spikes to comparative periods.