Comments on: Are you collecting your invoices effectively?

By: Satish

Satish — Fri, 25 Feb 2011 08:53:35 +0000

Hi Joshua,

The DOSIAR & BPDSO are one and the same right, correct me.

Regards,
Satish

By: elizabeth campbell

elizabeth campbell — Sun, 29 Aug 2010 22:07:54 +0000

How does the CEI and other receivable metrics relate to staffing levels? Is there a corresponding formula for outbound collection calls/payments to CEI? I am trying to bridge the gap between our results and number of collectors to determine the appropriate staffing levels.

Thanks!

By: Lisa

Lisa — Mon, 07 Dec 2009 20:45:40 +0000

Joshua – Thanks so much for your reply. I look forward to your updates!

By: Joshua Burnett

Joshua Burnett — Sun, 06 Dec 2009 13:47:28 +0000

Lisa, Thank you for pointing this out. Yes you are correct. From a strictly mathematical perspective traditional DSO is just a ratio of your A/R balance / Avg daily sales and it is as you said – “the number of [average] days sales .. in your A/R”.
another way to look at it is —
average daily sales = total sales in period / # of days in period
DSO or your term DOSIAR(days of sales in A/R :-) ) = A/R balance / average daily sales

This ratio above points out well why I don’t like traditional DSO alone. Especially if you are a fast growing company. If you are constantly doubling sales every quarter like we have in the past then DSO looks misleading low since average daily sales is growing faster. Its nice to have “the number of days sales in your A/R” but what is that really telling you? At my company, I am most concerned about keeping CEI at 85% or greater and we use the Average DSO calc from my prior comment. We don’t us the old school DSO calc anymore for our internal goals.

I’ll try to get the blog post up on other ways to calculate DSO this week. I’ll make sure incorporate your point as well in that post

By: Lisa

Lisa — Sun, 06 Dec 2009 02:49:39 +0000

I am rolling around an idea I have and wanted to run it by you. Is another way to look at the DSO answer as the number of days sales that is currently sitting in your A/R vs. the average time it takes you to collect it? I ask this, because I am running a calc on a new line of business and only have 30 days worth to calc. The answer I get is 22, but more than 22 days have passed since month end – hence I shouldn’t in theory have anything in A/R. But, I do. I appreciate your thoughts. Great website and blog. It has been very insightful.

By: Joshua Burnett

Joshua Burnett — Tue, 01 Dec 2009 15:29:05 +0000

Marcel, you are hitting on one of the problems with DSO and a strong reason why we advocate the CEI and ADD in conjunction. There are a million ways to calculate DSO (ok maybe not a million but its close). Your calculation is technically correct. The question of “Which method is correct” or right is one that has plagued the A/R world for a long time. It also brings into question benchmarking against other companies. Using longer days within reason will usually be close to the 33.1 DSO above if we don’t have big sales spikes. Using higher days can be a good thing as it averages out the sales spikes but again it only really tells us what our DSO is right now. Many companies use the prior 90 days instead of 30 like my example used. The time you use is somewhat arbitrary. You could use 2 years (730 days) if you wanted to but what is that telling you?

The problem we have with the calculation you did is that it doesn’t take into account the average accounts receivable during that time and thus the impact on a companies cash flow during that time. If I have more money in my back account then I know what to do with then I can easily fund the company for 12 months and don’t care as much how I averaged or trended for the year. But thats not normally the case and DSO was poor at the beginning of the year and hurt my cash flow but your calc using 183 days only shows what we look like right now. Again, always track what the DSO was from month to month so you can trend it. The collections did a good job in Mar,Apr,May to catch up but the numbers didn’t look so good in Dec,Jac,Feb.
Some companies (like SAP) use what we call an Average DSO calculation (Rolling Average DSO) and snapshot that every month for trending. Usually we try to use 12 months but in this case we will use 6 since we have the data above for an example. This will show you how DSO ran for the 6 months overall.
(Rolling) Average DSO = average A/R last 6 months / average credit sales last 6 months X 30.5(average days in a month)
so its 3,138/3,3636 * 30.5 = 35.3

By: Marcel

Marcel — Mon, 30 Nov 2009 22:44:47 +0000

I like your article, but I have a question about the presented DSO figures. According to the definition of standard DSO ((Ending Total Receivables / Total Credit Sales) x Number of Days in Period) I get different DSO figures..

At the end of may I count: 183 days, total revenues for this period = 18831 , ending receivables = 3295. Based on this calculation I get 3295/18831 * 183 = 32 days. Is there a reason why you decided to use the monthly revenue (3295/3089 * 31 = 33,1 day) and not the accumulated one? The same is valid for best possible DSO. Which method of calculation is correct?

Thank you.

By: Joshua Burnett

Joshua Burnett — Mon, 01 Jun 2009 22:05:02 +0000

Hi Tom, We get this confusion a lot so I appreciate the question. you need to look at the numbers over a period of time and use average days delinquent ADD. Best Possible DSO is not a good one to look at without DSO as well thus the ADD to look at for the trend. This will also not work well if you only look at one month in isolation like your example.
Using your example lets play out 2 months later to end of March and assume each period you did the same thing as you laid out above. assume the 30 terms invoices got paid and of course the 90 days will still be current. You have $100 invoices net 90 for Jan,Feb and Mar. You will have another $100 Net 30 for March. A Total of $400 will be due.
Your numbers will be
Total Current Sales BP DSO DSO ADD
$400 $400 $200 62 62 0

So 62 is your best possible days sales outstanding and so is your DSO. ADD will be 0
Now lets say that one of those $100 invoices that were net 30 did not get paid.. then you will have
Total Current Sales BP DSO DSO ADD
$500 $400 $200 62 77.5 15.5

Make sense?
Again, Its the ADD trend that you want to look at, not the BP DSO. The trend will tell you whats going on and if you get a weird spike in DSO the ADD and CEI will let you know if it is a valid spike. Also, if you have a steady DSO and you see a drop in CEI or a spike in ADD then you also know something is up and the AR is probably not performing. Thats the main point. It works if you are looking at normal steady numbers.

By: TomT

TomT — Mon, 01 Jun 2009 19:46:11 +0000

Best DSO has always confused me because what do you do if you use multiple terms? “Current” is not just net 30 but in our case, it could be net 30/60/90. Does this mean you have to look at every invoice in the current bucket (making it impractical to use). My example:

One customer with $100 in sales and 30 day terms and one with $100 and 90 day terms have sales in January. My aging at the end of Jan looks like this:

Total Current Sales BP DSO DSO
$200 $200 $200 31 31

But the best I can possibly do is a DSO of 60 if both accounts pay exactly on time. Is there anyway to do the math correctly based on the global dollars in your aging and not pull apart every single invoice?

By: The DSO Calculation (Days Sales Outstanding) | Greenbill

The DSO Calculation (Days Sales Outstanding) | Greenbill — Tue, 31 Mar 2009 22:22:20 +0000

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