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Finance: What is Days Sales Outstanding? 30 Views
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Description:
What is Days Sales Outstanding? Days sales outstanding is a figure that looks at how long it takes a company to get their money after they’ve made a sale. It takes into account sales that are made through accounts receivable and are paid for using cash or credit, then determines the average number of days it takes to collect payment.
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Transcript
- 00:00
finance a la shmoop- what is days sales outstanding? okay so this isn't a
- 00:08
congratulatory missive, like hey you have a lot of sales today [men in suits smile]
- 00:13
outstanding! no it's nothing like. that day sales outstanding or dsos is a
- 00:18
balance sheet computation that puts in perspective how well or rather how
- 00:22
quickly you are collecting the bills you are owed for stuff you have sold. like
Full Transcript
- 00:28
let's say your company pulp friction is selling paper pulp to the newspaper [paper truck]
- 00:32
industry. gradually week after week month after month quarter after quarter your
- 00:37
DSOs are creeping upward from the thirty eight days to now fifty three days in
- 00:43
the course of a few years. well what's going on here
- 00:45
well if the newspaper industry were financially healthy it would be [doctor examines office building]
- 00:49
reasonable that they would want to pay their bills on time, but clearly there is
- 00:54
a trend here. another year goes by and DSOs are now at sixty four days. this is
- 00:59
a problem people the industry is paying for the pulpit consumes to print on
- 01:04
paper at a slower rate than they did before. well why well the newspaper [chart shown]
- 01:08
industry is slowly going broke and they're trying to conserve as much cash
- 01:12
as they can, by leaning on their vendors to essentially finance them so that they
- 01:18
you know die more slowly. key takeaway DSOs are a relative number that is in a [equation]
- 01:24
vacuum, if you just look at one number as a representation of DSOs it doesn't
- 01:29
really mean anything. dsos have to be taken in context of the
- 01:32
history of the company itself and in context of whatever the industry average
- 01:36
is. like maybe the average DSO of a pulp maker is highly seasonal, and each year at [man smiles with sunshine and rain]
- 01:42
ebbs and flows with the weather. or maybe your particular pulp company was way
- 01:46
better than the norms and it's just normalizing as DSOs creep back up to the
- 01:52
industry standard of 64 days. context. alright so the calculation. how do you
- 01:57
calculate DSO? well it's this just accounts receivable divided by sales [equation]
- 02:02
made on credit. and if you're inside of a large corporation you can assume that
- 02:06
all sales are made on credit. it's not like a McDonald's Store where a USA
- 02:10
Today or The Wall Street Journal walks in hands [ drive through window]
- 02:12
warehouser the pulp company 14 million dollars in cash for 7,000 tons of pulp.
- 02:17
think about the equation. its volatile. and it can turn into a quote good
- 02:20
unquote number quickly by having your pulp [man eats dinner]
- 02:24
selling business turned sour. like nobody buys from you for a long time and
- 02:29
everyone pays their bill .well all of a sudden you have a DSO number of like [dump truck knocks man over]
- 02:33
five, because nobody owes you money in the form of your account receivable. not
- 02:37
a good situation either again DSOs need context. a huge DSO number can be just
- 02:42
fine as well all of the sudden China Russia and all [world map]
- 02:45
of Latin America buy your pulp. you suddenly have a billion dollars in
- 02:50
accounts receivable and it'll take you months and months and months to fulfill
- 02:53
those orders. so your dsos then balloon up and look
- 02:57
bad, well most companies would kill to have this quote bad unquote DSO number. [man is mugged]
- 03:02
so that's it DSOs are just a relative index of how well you are collecting
- 03:06
your bills. receivables over sales that's it. outstanding work [equations]
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