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How many days of sales are sitting in AR?
Calculate DSO, then take out retainage that isn't due yet and separate payment terms from late payment, so the number points at something you can fix.
Receivables and sales
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Results
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Days sales outstanding
60 days
$1,350,000.00 in AR ÷ $22,500.00 of sales per day
Excluding retainage: 47.1 days
- Credit sales per day
- $22,500.00
- DSO, all receivables
- 60 days
- Retainage held under contract
- 12.9 days
- DSO excluding retainage
- 47.1 days
- Best possible DSO (not yet due)
- 32 days
- Average days delinquent
- 15.1 days
Of the 60 days, retainage accounts for 12.9 days, normal terms for 32 days, and late payment for 15.1 days.
How the numbers work
- Credit sales per day
- Credit sales in the period ÷ days in the period.
- DSO
- Accounts receivable at period end ÷ credit sales per day.
- DSO excluding retainage
- (Receivables − retainage receivable) ÷ credit sales per day.
- Best possible DSO
- Receivables not yet past due ÷ credit sales per day. What DSO would be if every customer paid on time.
- Average days delinquent
- DSO excluding retainage − best possible DSO. The days caused by late payment.
Use period-end receivables and sales for the same period. A big billing at month-end raises DSO without anyone paying late, so look at the trend over several periods before drawing conclusions.
Related
Common questions
- What is a good DSO?
- It depends on your terms. A company billing net 30 with DSO of 35 is collecting well; the same 35 on net 15 terms means customers pay late. Compare DSO with your terms and with your own trend, not with another industry.
- Why separate retainage?
- Retainage is held under the contract and is not due until a milestone or completion. Leaving it in DSO makes collections look slower than they are and hides real late payment inside a number nobody can act on.
- What is average days delinquent?
- DSO minus best possible DSO. Best possible DSO counts only balances that are not yet due, so the difference is the part of DSO caused by late payment. That is the part collections can actually work on.