This video shows how to calculate Days Sales Outstanding, which is also known as the Average Collection Period.
Days Sales Outstanding is calculated by dividing the number of days in a period (e.g., if we’re talking about one year, the number would be 365) by the company’s Accounts Receivable Turnover Ratio for the period. This tells you the number of days it takes the company to collect a credit sale. For example, if the Accounts Receivable Turnover Ratio is 5 and we are looking at a period of a year, the Days Sales Outstanding would be 365 / 5 = 73 days. This means it takes the company 73 days to collect a credit sale.
A lower Days Sales Outstanding is considered a good thing because it means the company is promptly collecting its credit sales. If the company’s Days Sales Outstanding is increasing over time, this could mean that the company is relaxing its credit policy and extending creditworthy to customers who are less likely to pay. It also could mean that the existing customers are taking longer to pay because they are experience financial difficulties.