Days Sales Outstanding
Days sales outstanding also known as average collection period or days sales in receivable which is used to measure the number of days which the company has taken to collect cash from the credit sales. To find the efficiency and liquidity of the collection department of the company this ratio is used.
If the cash collection of the company is greater then this cash may be used for other operations. If the measurement is lower days sales outstanding of the company then the company have good cash flow and liquidity otherwise bad.
Days sales outstanding can be calculated by the following formula. you just need to divide the account receivable by net credit sales and then multiply by the days of the period. Mostly these calculation companies take for the year for which multiple by 365 days.
Days sales Outstanding=(account receivable/net credit sales) X 365
From the year-end balance sheet we can get the value of account receivable and from the income statement, we get the value of net credit sales.
By using the receivable turnover ratio this formula can be calculated also.
The days’ sales outstanding formula is used to find the efficiency of the company to collect cash from the customer. This formula is mostly used by the management and investor to check the efficiency of any company. If cash cannot collect then sales does not matter. This ratio shows the number of days which a company take to convert its sales into cash.
If the ratio is lower then it means that the company convert sales into cash earlier and use this cash for other operations. From this lower ratio, we found that account receivable of the company is good and not nad debt.
If the ratio is high then the company is considered to be bad debt company. The collection of cash from the customer by high ratio company is not good. So it cannot convert sales into cash quickly.
john is the retailer which offer the credit to customers. He sale the inventory on account to the customer with the agreement that cash will be repaid within 30 days. Some payoff cash in time but some customer get delay to payoff. At the end of the year, the financial statement of John has the following value
- account receivable = 15000 dollars
- net credit sales = 175,000 dollars
Form this we can calculate John’s sales
31= (15,000/ 175,000) x 365
From the above result, we know that John takes 31 days average to collect cash from the customers. As John give the 30 days period on the base of which 31 days is the good result.
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