Daily Sales Outstanding Formula
The formula is derived from an understanding that a company’s success is measured by returns. More specifically, it refers to the notion that the more receivables are collected, the better off a company is faring. The “365” refers to the number of days contained in the recording period. If you calculate an overall estimate of Daily Sales Outstanding for the year, utilize 365 as an appropriate figure; representing the 365 days in the year.
Accounts Receivable Explanation
The average accounts receivable is fairly straight forward. This figure represents the overall amount that a company is owed. As the receivables goes up, that means that the company is making more sales overall. More clients owe the company money and therefore the net worth is increasing. At the same time, however, if receivables continues to increase, that means that the company has money that it has not collected yet (outstanding dues). The final important aspect of this formula is the total number of sales. The total number of credit sales refers to the total number of sales made as a whole. It makes sense for this number to be the denominator of this formula because of the fact that the total number of sales acts as a success indicator as a whole.
DSO & Accounts Receivable
At the end of the day, as the Daily Sales Outstanding formula yields lower figures, the organization continues to collect the money owed to them. This is what makes the recording period so important. When introducing the number of days in the recording period into the equation, translate the overall success of the company into the timeline of the collecting period. Using the Daily Sales Outstanding formula, the company can determine the outstanding balance of returns that they are owed on a daily basis.
Additionally, you can compute the Daily Sales Outstanding formula in two very similar ways. The first method is the one that is listed above, using the average accounts receivable. The other method takes the overall accounts receivable instead of the average. Many companies use the average accounts receivable because it gives a more accurate picture of the company’s performance.
If you want to reduce your DSO, download our free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.
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