Days sales outstanding measures the number of days it takes your business to collect cash from sales made on credit. The value shows the efficiency of your business’s collections department as you bring in revenue from outstanding invoices. Days sales outstanding may also go by the names average collection period or days sales in receivables.
How Do You Calculate Days Sales Outstanding?
Follow a simple formula to calculate days sales outstanding for your business.
Take the balance you have in accounts receivables and divide by the total credit sales. Multiply the result by the number of days over a particular period. For example, say your company made $500,000 in sales during one April and at the end of the month you had $200,000 in accounts receivable. That gives you a figure of 0.4. Multiply the 0.4 figure by 30 for the number of days in April. The final figure is 12 days, meaning your accounts receivable department collects money in less than two weeks.
A number of 12 days sales outstanding is a very good figure. Lower numbers for days sales outstanding mean your company is very good at collecting money from outstanding invoices.
Looking at another example, imagine you made $500,000 in November and at the end of the month you had $400,000 in accounts receivables. This gives you a figure of 24 days sales outstanding. This higher figure means your accounts receivable department takes nearly a month to collect money.
You can alter the figure to calculate for a financial quarter or for a year so long as you calculate the time period in days. For a quarter, that’s 90 days. A year equals 365 days using this formula.
Why Is Days Sales Outstanding Important?
Measuring days sales outstanding gives you an opportunity to measure the efficiency of your collections department. If your invoices give customers 30 days to send money and your days sales outstanding approaches 30, that means your company has a hard time collecting money until it is very close to coming due. If your invoices give clients 90 or 120 days to send money, a days sales outstanding figure of 30 is more manageable if that type of collection fits your business model.
Your calculation for days sales outstanding lets you change your sales or money-collection strategies. Perhaps you need to incentivize customers to pay invoices early or find another way to collect money from clients if your days sales outstanding figure goes higher. QuickBooks Online offers an easy way to send invoices and collect online payments. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.