Days Sales Outstanding for your Business Plan
A business which sells on account to its customers will at any point in time have amounts outstanding from them for unpaid invoices. The amount outstanding is referred to as accounts receivable, or sometimes as trade debtors.
If the value of the accounts receivable is divided by the value of the average daily sale, then the resulting figure is the number of days sales which are outstanding. This number is referred to by a number of different names including days sales outstanding, accounts receivable days, days sales in receivables or debtor days.
Days Sales Outstanding in the Financial Projections Template
The financial projections template uses the value of days sales outstanding to calculate the year end accounts receivable based on the projected annual sales for the year.
Our free days sales calculator can be used to calculate a value for inclusion in the financial projections template.
Established Business Plan
For an established business, the days sales outstanding can be calculated from the latest set of accounts. The figures to use are the value of accounts receivable (debtors) from the balance sheet of the business, and the value of sales from the income statement.
For example, if the annual sales are 150,000 and the accounts receivable balance is 15,000, then the days sales outstanding is given by 15,000 / (150,000 / 365) = 36.5 days. This means that on average it takes the business 36.5 days to collect accounts receivable from its customers.
If the income statement is not for a full year, then divide the sales for the period by the number of days in the period, this will give the average daily sales over that period.
As a check, unless accounts receivable collection procedures are not being adhered to, the days sales outstanding should be similar to the credit terms offered to customers
Startup Business Model
The days sales outstanding for your business will depend on the type of industry in which it operates. A predominantly cash based business will have a very low days sales outstanding, in the order of a few days, whereas a manufacturing business might have a days sales outstanding in the region of 90 days or higher.
The figure to use for the days sales outstanding is the credit terms being offered to your customers, which should normally reflect the industry averages. If industry averages cannot be found, then use the published accounts of similar companies or competitors, and carry out the calculation described above for established businesses.
Ultimately, the value of days sales is the amount of credit your business is prepared to offer customers, and procedures need to be in place to ensure this is adhered to as part of the business plan. It is important to understand that a startup business might be required to offer beneficial terms or perhaps a free trial period in order to establish its business with new customers, and that even good customers will not always pay on time.
Having entered the days sales outstanding, the template calculates the accounts receivable at the end of each subsequent year by multiplying the days sales by the average daily sales for the year.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to determine the level of inventory days to be used in the projected balance sheets.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial models for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.