What is days sales outstanding?

Definition

Days sales outstanding is how long, on average, an invoiced sale sits as a receivable before cash arrives. On the books, it is a timing reading of accounts receivable against credit sales, not a ledger account.

An HVAC shop that invoices net 30 uses it to see whether cash is actually arriving in 30 days. A higher figure means invoices are sitting longer; a lower figure means customers are paying faster.

It is an average across the open invoices, not the age of any one job. One slow commercial account can pull the average up even when homeowners pay on time.

Stay with collection days on this page. A longer average means cash is slower to arrive.

Where it shows up

Balance Sheet: Related to accounts receivable.

P&L: Related to credit sales in the period.

Cash flow: Related to when those sales actually become cash.

See also: Accounts Receivable · Accounts Receivable Aging · Cash Conversion Cycle

When you look at the Balance Sheet, this reading starts from the accounts receivable total. You will not find a line labeled with these days.

The Income Statement supplies the credit sales in the period. Cash sales do not belong in the denominator, because they never sat as invoices.

On the Statement of Cash Flows, a rising figure often pairs with receivables using cash. Changes in working capital will show that drag even when leftover profit looks fine.

An aging report buckets the same invoices by how late they are. This page collapses those buckets into one average so you can watch the trend.

When the figure is well above the terms you print on invoices, cash is slower than the shop planned. When it is at or under those terms, collections are keeping up with the work.

How it works

Take the accounts receivable balance. Divide it by average credit sales per day for the same period.

Average credit sales per day is credit sales divided by the number of days in the period. A 30-day month with $30,000 of credit sales is $1,000 a day.

The result is how many days of sales are still sitting uncollected. It is an average, not a promise that every invoice clears on that day.

Use credit sales, not total revenue, when some jobs are paid at the truck. Mixing cash jobs into the denominator makes collection days look faster than they are.

Stay with this one lag when you read it. Inventory days and payable days are other legs, and they are not this page.

The figure goes up when you invoice more than you collect, or when a few large jobs slip. It goes down when checks and card batches catch up with the open invoices.

Match the period to the balance you are reading. A year of sales against month-end receivables will understate the lag.

After the month closes, recompute with the new receivable total and that month's credit sales. Last month's 42 days is history.

Example

Harbor HVAC invoices net 30 and has $42,000 of accounts receivable. Credit sales for the 30-day month were $30,000.

Average credit sales per day are $30,000 divided by 30, which is $1,000. Divide $42,000 by $1,000, and days sales outstanding is 42.

Those 42 days are 12 days past the terms on the invoice. The shop is waiting an extra 12 days, on average, for cash that the terms said would arrive in 30.

If the same month's receivables had been $30,000, the figure would have been 30 days. Collections would have matched the printed terms.

A $12,000 rooftop job that sits 60 days will pull the average up even if smaller service invoices clear in 25. The aging report is where you see that one invoice; this page is the blended lag.

If next month's credit sales stay $30,000 and receivables fall to $36,000, the figure drops to 36 days. Cash came back faster without a change in the work booked on the Income Statement.

Common mix-ups

Days sales outstanding is not the receivable balance. The balance is a dollar total; this page is how many days that total represents.

Days sales outstanding is not the terms printed on the invoice. Net 30 is the agreement; 42 days is how long cash actually took.

Days sales outstanding is not the cash conversion cycle. The cycle nets inventory, receivable, and payable days; this page stays on collection days only.

Related terms

• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Accounts Receivable Aging: A report bucketing open invoices by how long they have been outstanding.
• Collections: The process of following up on unpaid customer invoices.
• Cash Conversion Cycle: The number of days between paying for inputs and collecting from customers.
• Accounts Receivable Turnover: How many times receivables are collected and replaced in a period.
• Payment Terms: The agreed deadline and conditions for paying an invoice.
• Invoice: The document that bills a customer and creates a receivable.
• Dunning: The sequence of reminder notices sent as an invoice ages past due.