Primary Implication

The fewer the number of days sales are outstanding the faster the cash from those credit sales is getting collected from your customers.  A lower number also shows that A/R is less likely to be written off as bad debt.  The inverse for this efficiency ratio reveals there is a problem with collection procedures.  Your customers are either unable or unwilling to pay for their purchases from you, resulting in delayed cash inflows.

Overview

Day’s Sales Outstanding is an Efficiency Ratio that measures the number of days it takes a company to collect cash from its credit sales.  Remember, a completed sale doesn’t matter until the cash is efficiently collected.

Days’ Sales Outstanding calculates the liquidity and efficiency of a company’s collections by showing how well a company can collect cash from its customers by measuring the number of days it takes a company to convert its sales into cash.

The formula for calculating the Day’s Sales Outstanding is as follows:

(Accounts Receivable / Net Credit Sales) X 365

If your payment terms are net 30 and your day’s sales outstanding is 50, this means it takes you 50 days, on average, to collect cash from your customers.  I.e., you have more delinquent customers than you have prompt payers for the goods and services you sold them.

Shorter is Better:  this means cash is getting collected from your customers. A lower number also shows that A/R is less likely to be written off as bad debt.

Longer is Worse: reveals there is a problem with collection procedures. Your customers are either unable or unwilling to pay for their purchases from you.