Days Sales Outstanding (Meaning, Formula)

What is Days Sales Outstanding (DSO)?

Days Sales Outstanding is the average number of days the company takes to convert its accounts receivables (credit sales) into cash and helps us determines how good a company is in collecting its dues.

When a company sells its products to another company, they sell a major share of the products on credit (sometimes the cent percent share). And then, after a certain period of time, the company collects the money from its debtors. DSO is a calculation.

Let us look at the graph above. We note that Colgate’s DSO has been decreasing continuously and is currently at 34.09 days. On the other hand, Procter and Gamble DSO has been moving up and down and is currently lower than that of Colgate at 25.15 days.

Days Sales Outstanding Formula

Here is the DSO formula below

Days Sales Outstanding Formula = Accounts ReceivablesAccounts Receivables Accounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more / Net Credit Sales * 365

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Source: Days Sales Outstanding (wallstreetmojo.com)

Interpretation

In the above Days Sales OutstandingDays Sales Outstanding Days sales outstanding portrays the company's efficiency to recover its credit sales bills from the debtors. The number of days debtors took to make the payment is computed by multiplying the fraction of accounts receivables to net credit sales with 365 days.read more formula, you can see that the accounts receivables are being proportioned with the net credit sales. The accounts receivables are the amount due to the debtorsDebtors A debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more. And the net credit sales can be calculated as follows –

Net Credit Sales = Gross Credit Sales – Sales Returns/Allowance/Discount

And then the proportion is being multiplied by 365 days to see the overall impact in a year.

So, what the Days Sales Outstanding depicts?

It depicts how much money has already been collected and how much is yet to be received.

Understanding this will give an investor an idea of how good a company is in collecting its money due to its debtors. And we would be able to judge the efficiency of the collection as well.

The point is, days sales outstanding help us decide how long it takes for the company to collect money from its debtors, and the number of days is added to the day’s inventory outstanding. Days inventory outstandingDays Inventory Outstanding Days Inventory Outstanding refers to the financial ratio that calculates the average number of days of inventory held by the company before selling it to the customers, providing a clear picture of the cost of holding and potential reasons for the delay in the inventory sale.read more helps us understand how long it takes to transfer the raw materials into finished products. And then, from the sum, DPODPO Days Payable Outstanding (DPO) is the average number of days taken by a business to settle their payable accounts. DPO basically indicates the credit terms of a business with its creditors. read more is deducted. DPO tells us how long it takes for the company to pay off its due to its creditors.

Days Sales Outstanding Examples

Here we will take two examples. In the first example, we will go through a simple DSO calculation. And in the next example, we will see how to calculate the cash conversion cycleCash Conversion Cycle The Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.read more.

Example#1

Company Xing had gross credit sales of $500,000 in a year. It had sales returns of $50,000. It had accounts receivables of $90,000. Find out the Days Sales Outstanding (DSO).

In this example, first, we will find out the ‘net credit sales.’

Gross credit sales are given, and we also have a sales return.

So, the net credit sales would be = ($500,000 – $50,000) = $450,000.

We also have been given accounts receivables. It is $90,000.

Now, we need to put the data into the DSO formula.

DSO Formula = Accounts Receivables / Net Credit Sales * 365

Or, Days Sales Outstanding = $90,000 / $450,000 * 365 = 1/5 * 365 = 73 days.

That means Company Xing takes 73 days to collect money from its debtors on an average.

Example#2

Company Zang has the following information –

Cost of Sales – $300,000.
Ending InventoryEnding Inventory The ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more – $30,000.
Accounts Payable – $60,000.
Accounts Receivables – $60,000.
Net Credit Sales – $360,000.

Find out Days Inventory Outstanding (DIO), Days Payable Outstanding (DPO), and Days Sales Outstanding (DSO). And then also calculate the cash conversion cycle.

This is an advanced example.

We will first calculate the three important parts of the cash conversion cycle, and then we will ascertain how many days it takes to complete the cash conversion cycle of Company Zang.

We will first look at each formula and put in the data to find out the ratio.

The formula of Days Inventory Outstanding (DIO) = Ending Inventory / Cost of Sales * 365

Putting the data into the formula, we get –

DIO = $30,000 / $300,000 * 365 = 1/10 * 365 = 36.5 days.

The formula of Days Payable Outstanding (DIO) = Accounts PayableAccounts Payable Accounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more / Cost of Sales * 365

Putting the data into the formula, we get –

DPO = $60,000 / $300,000 * 365 = 1/5 * 365 = 73 days.

DSO = Accounts Receivables / Net Credit Sales * 365

Putting the data into the Days Sales Outstanding formula, we get –

DSO = $60,000 / $360,000 * 365 = 1/6 * 365 = 60.73 days.

Now, we will look at the formula of the cash conversion cycle –

Putting the data into the formula, we get –

Cash Conversion Cycle = 60.73 days + 36.5 days – 73 days

Or, Cash Conversion Cycle = 24.23 days.

Since the company takes more time to pay off its creditors, quickly collects the money from its debtors, and translates the raw materials into finished goods in a short period of time, it is able to create a cash conversion cycle, which is just 24.23 days.

From the point of view of efficiency, it’s a great achievement because cash flow is the lifeblood of the business. And from the calculation above, it is evident that Company Zang has been doing quite well in completing the full cash conversion cycle within a short period of time.

Note: A quick note is needed to be given here. Just calculation of the cash conversion cycle isn’t enough to justify whether the company is doing well or not. Of course, completing the cash conversion cycle within a month is commendable; but we also need to compare the result with other similar companies under the same industry to get an idea about it.

Sector Examples of Days Sales Outstanding

Airlines Sector

Below is the DSO of top companies in the Airlines Sector

Name	Market Cap ($ billion)	DSO
American Airlines Group	24,614	13.71
Alaska Air Group	9,006	15.82
Azul	7,283	0.00
China Eastern Airlines	9,528	28.53
Copa Holdings	5,788	18.62
Delta Air Lines	39,748	18.80
Gol Intelligent Airlines	21,975	23.95
JetBlue Airways	6,923	8.48
LATAM Airlines Group	8,459	41.32
Southwest Airlines	39,116	9.11
Ryanair Holdings	25,195	3.45
United Continental Holdings	19,088	11.50
China Southern Airlines	9,882	19.04

We note that the list of companies above have a mixed Days Sales Outstanding ranging from 0 to 41.32 days
LATAM Airlines Group has one of the highest DSO with 41.32 days, whereas Ryanair Holdings have a lower DSO at 3.45 days.

Automobile Sector

Below is the DSO of top companies in the Automobile sector.

Name	Market Cap ($ billion)	Days Sales Outstanding
Ford Motor	50,409	136.51
Fiat Chrysler Automobiles	35,441	22.92
General Motors	60,353	63.72
Honda Motor Co	60,978	67.85
Ferrari	25,887	139.05
Toyota Motor	186,374	109.18
Tesla	55,647	17.42
Tata Motors	22,107	35.34

Ferrari and Ford Motors have one of the highest Days Sales Outstanding at 139.05 days and 136.51 days, respectively.
Tesla has one of the lowest DSO in the group of Automobile companies at 17.42 days.

Discount Stores

Below is the DSO and Market Cap of top companies in the Discount Stores sector.

Name	Market Cap ($ billion)	Days Sales Outstanding
Burlington Stores	8,049	2.67
Costco Wholesale	82,712	3.80
Dollar General	25,011	0.15
Dollar Tree Stores	25,884	2.58
Target	34,821	3.90
Wal-Mart Stores	292,683	4.30

Overall, we note that the sector has a very low DSO. Most of them range from 0.15 days to 4.30 days
WalMart Stores has a DSO of 4.3 days, whereas Dollar General has a DSO of 0.15 days.

Oil & Gas Sector

Below is the DSO of top companies in the Oil & Gas Sector.

Name	Market Cap ($ billion)	Days Sales Outstanding
ConocoPhillips	62,980	59.39
CNOOC	62,243	56.57
EOG Resources	58,649	52.48
Occidental Petroleum	54,256	122.14
Canadian Natural	41,130	67.57
Pioneer Natural Resources	27,260	69.06
Anadarko Petroleum	27,024	97.34
Continental Resources	18,141	127.25
Apache	15,333	81.16
Hess	13,778	82.32

We note that overall, this sector has a higher DSO as compared to other sectors.
In this group, Continental Resources has the highest DSO of 127.25 days, whereas EOG Resources has a lower DSO of 52.48 days.

Net credit sales to calculate Days Sales Outstanding ratio?

If you’re new to investments, you may wonder how you would get the data of the accounts receivables and net credit sales.

In this section, we will get you covered.

All you would need is two financial statements – the balance sheet and the income statement.

In the balance sheet, you would be able to locate the accounts receivables. You need to look under the assets section where current assetsCurrent Assets Current assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more are given. Under current assets, you will get the data for accounts receivables.

In the income statement, you will get the data for net credit salesNet Credit Sales Net credit sales is the revenue generated from goods or services sold on credit excluding the sales discount, sales allowance and sales return. It even amounts to the accounts receivables for a certain accounting period.read more. At the beginning of the income statement, you would see the gross sales. This “gross sales” includes both – cash & credit sales. You need to pick the credit sales, and you also need to deduct the sales returns (if any) which have been returned in the case of credit sales.

Using these two, you would easily be able to calculate the day’s sales outstanding (DSO). And by looking at the income statement and the balance sheet, you would also be able to find the cost of salesCost Of Sales The costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more, ending inventory, and accounts payable to be able to ascertain the cash conversion cycle.

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Days Sales Outstanding