Days Sales Outstanding is the number of days needed by the company to collect revenue from the sales process. Okay, for example like this, there is a company that produces consumer goods and of course the activity of the company is to sell the goods it produces. So, at the time of the sale, there are many methods that can be done through cash transactions between the company and consumers or by other methods such as using credit facilities for a certain period of time.
From the sales method, it must form various processes of collecting money by the company. With the process of collecting money from the sale, it is ultimately related to the cash turnover in the company. The fewer days of outstanding sales, the better the cash turnover of the company. Yes, the less time it takes for the process of converting goods into collected money, the better the company’s cash flow because it has smooth cash assets.
Usually, the calculation of sales circulating days is grouped based on a certain time unit, some use the daily period, some use the weekly method, some use the monthly method, some use the quarterly method, some use the semiannual method, and some use the annual method. It depends on the interests of what information is needed from the company.
By generating sales, the company will directly generate receivables or other parties owe the company. Days Sales Outstanding has a formula for the time period divided by accounts receivable turnover.
Days Sales Outstanding = Period of time (can be daily, weekly, etc.) / Accounts Receivable Turnover
Receivable turnover itself is generated from revenue for accounts receivable
Accounts Receivable Turnover = Income / income
For example, in the case of company A, which has an annual income of 1000000 with total receivables of 100000, the calculation of Days Sales Outstanding is:
Days Sales Outstanding = 365 / (1000000/100000) = 36.5
From there we can see the relationship between revenue and these receivables. The greater the income and the smaller the accounts receivable, the smaller the value of the days of outstanding sales, which means that the company has the performance to collect its receivables faster. The faster the time for collecting outstanding sales days, the faster the cash flow turnover of the company and the healthier the company because the cash generated by the company is getting faster. By accelerating the collection of outstanding sales days, it will directly increase the liquidation of the company.
We know that the liquidity performance of a company is very very important because it is related to the confidence of the company to make fast movements to support the company’s performance. For example, with high liquidity, the company can pay its debts, or if the company is going to expand its business, it does not need to owe other parties because cash is available.
Apart from that, Days Sales Outstanding is an important factor for parties outside the company such as investors who will definitely see this factor because the better the DSO value of a company, the more interested these investors are to invest their capital because investors consider that the company is very liquid in terms of cash.
Days of sales outstanding (DSO) Is a ratio for calculating the company’s receivables turnover rate where the ratio of Days of sales outstanding is a kind of assessment of the time or days needed to collect the acquisition of an amount of money or income from sales made through the expertise of the sales / sales division in management receivables over a certain period of time and ensure the compliance and speed of customers in paying their debts.
In calculating using Days of sales outstanding the parameter is measured from the indicator, the lower the DSO value, the more effective and profitable the company will be in terms of the value of cash inflow turnover which is considered as the faster rate of receivables turnover or requires less time to process payments from customers. Meanwhile, if the DSO value is getting bigger / higher, it indicates that the company selling its products to customers takes longer to collect money or withdraw its receivables.
The accounts receivable turnover ratio, known as Days of Sales Outstanding (DSO), usually uses the number of days for business operations carried out in a year or uses a value of 365 days to get the value of the DSO turnover ratio.
DSO is usually calculated monthly, but sometimes it can be quarterly, quarterly, and annually. This ratio shows how the company handles accounts receivable. If the DSO is high, it means the company needs more time to collect their receivables. Conversely, if the DSO value is low, it means that the time to collect receivables is relatively short.
However, this needs to be compared with the applicable payment terms. For example, when it is determined that accounts receivable will be paid in 20 days. However, in reality, new receivables are obtained on the 40th day. This means that the company needs to improve the receivables collection process so that it is in accordance with the contract. Because if allowed to drag on, then this could disrupt the company’s cash flow.
DSO data is usually collected to be processed into a trend as analysis material. From here it will be known how the DSO changes from time to time. If the DSO value has increased over the past period, this indicates many things. Starting from bad clients, clients extend payment due to certain factors, client dissatisfaction, and so on.
Especially for seasonal companies, their DSO value is sure to fluctuate from time to time. Because of that, companies cannot use trends, but they can simply compare DSO data with the same period in the previous year. For example DSO April 2020 with DSO April 2019.
