How to calculate Days Sales Outstanding – DSO

How to calculate Days Sales Outstanding – DSO

Objective:

In today’s competitive world , it is important for any organisation to operate with minimum working capital . If company is buying raw material on advance or with less credit days , say 10 days and their customer makes payment in 21 days , it will disturb working capital cycle for a company. One should know how to calculate Days Sales Outstanding – DSO which provides vital information regarding their customers when they are making payment .

Definition :

Days Sales Outstanding – DSO means how much time(Days) it takes for a company to recover sales revenue from customer. Here sales revenue include indirect taxes i.e. GST on sales value . Higher the DSO , less recovery from customers.Lower DSO , lesser working capital requirement . DSO can be Calculated for a month, quarter or Year . For better control , I suggest to use it on monthly basis .

Formula:

Days Sales Outstanding- DSO =  (Outstanding at end of previous month / Sales for the previous month) * 30

Here if you are calculating for monthly basis , you can take days of particular month e.g. 31 days for July however when you have to prepare Management Information System (MIS) on DSO, it will not make material impact of decision if you assume 30 days in above formula .  If you are calculating for quarter , mention sales for last three months and multiply it with 90 days .   instead of taking last month Outstanding you can consider average of last three months Outstanding. For yearly calculation , I suggest to take monthly average DSO .

Example – How to calculate Days Sales Outstanding – DSO:

Let us understand DSO with example of individual customer and same can be used to calculate DSO for a company for all customers.

Company A has agreed payment terms of 15 Days with his customer Mr. Bond .  Suppose company has made sales of Rs.150 Lakh in June and Outstanding of Mr. Bond is Rs.100 Lakh as on 30th June .  Following table will guide how to calculate Days Sales Outstanding – DSO:

(Rs. 1 Lakh equal to 100,000 or Rs. 0.10 Million)

Click on link to download DSO Calculator .

You can see in above example that customer is having DSO of 20 Days against agreed payment term of 15 days . If Outstanding of Mr. Bond in above example remains at Rs.75 Lakh , DSO will be computed at 15 days . It means customer is not making payment on time and they is short payment of Rs.25 Lakh

Understanding DSO:

DSO apply for credit sales however in case of cash sales , it always remain as ZERO. For a company who operate on different distribution channel i.e. direct sales and sales through dealer or distributor it is important to calculate DSO separately for each channel. If customers are identifiable based on product , DSO can be calculated for each product .

DSO is fantastic tool to monitor account receivable . If you want more stringent control on your debtors , you can derived average credit days for a customer . i.e. Payment receive date minus invoice date. you have to see you bank reconciliation on daily basis . Some time customer may have paid through cheque but it may takes few days to clear the cheque due to any reason . Though DSO is showing good result, you will not get hard cash on time and DSO is not showing correct picture.

Always prefer to get payment on e-payment mode i.e. RTGS/NEFT and other mode of electronic payment from your customer. This will save lots of time in dispatch of cheque and deposition/clearing of cheque .

How to prepare DSO MIS with SAP or ERP System:

Here objective of this post to provide you practical knowledge about usage of DSO .  If you are using SAP, you may have  customize debtors’ aging report in you system.

1. Debtors Outstanding of previous month: SAP T-Code FBL5N- Open item date as last date of month . If you are using other ERP system like Tally , take customer wise Outstanding of previous month i.e. O/S as on 30th June .
2. Sales of Previous Month: Take Sales turn over of all product of previous month .
3. Now derive Total Sales in Rs. against outstanding of each customer using Vlookup formula based on customer code/customer name.
4. Now apply above given formula of DSO just beside Sales Column. you can click on this link to download DSO calculator .
5. You can you pivot table( Calculated field) to display DSO for each customer month wise .  Every month paste data at the end of previous month’s data so that you can have month wise summary . You can insert column for year also .

Hope this post provide you detailed insight into DSO , how to calculate Days Sales Outstanding – DSO. Please give your valuable feedback in comment section .