How to Determine Days Sales Outstanding

Days Sales Outstanding for your Business Plan

A business which sells on account to customers will at any point in time have amounts outstanding for unpaid invoices. The amount outstanding is referred to as accounts receivable, or sometimes as trade debtors. The amount is often expressed in terms of days and is referred to as days sales outstanding.

Days Sales Outstanding Calculation

Days sales outstanding is calculated by dividing the value of accounts receivable by the value of the average daily sale. The resulting figure is the number of days sales which are outstanding. Additionally this number is often referred to as accounts receivable days, days sales in receivables or trade 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.

Additionally 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 accounts receivable from the balance sheet of the business, and sales from the income statement.

For example suppose the annual sales are 150,000 and the accounts receivable balance is 15,000. In this case the days sales outstanding is given by 15,000 / (150,000 / 365) = 36.5 days. As can be seen 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 the average daily sales is calculated as the sales for the period divided by the number of days in the 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 and DSO

The days sales outstanding (DSO) for your business will depend on the type of industry in which it operates. For example a predominantly cash based business will have a very low DSO, in the order of a few days. In contrast a manufacturing business might have a DSO in the region of 90 days or higher.

In reality the figure to use for the DSO is the credit terms being offered to your customers. Such terms should normally reflect the industry averages. If industry averages cannot be found use published accounts of similar companies or competitors. The DSO calculation is then carried out as described above for established businesses.

Ultimately, the value of days sales is the amount of credit your business is prepared to offer customers. It follows that procedures need to be in place to ensure terms are 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 DSO, 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.