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Finance: What is Days Sales Outstanding? 30 Views


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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

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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