Days’ Sales Uncollected
Days’ Sales Uncollected (DSU), also known as Days Sales Outstanding (DSO), is a financial ratio that measures the average number of days it takes for a company to collect payment after a sale has been made. Essentially, it provides an estimate of the collection period for a company’s accounts receivable.
The formula for DSU is as follows:
\(\text{Days’ Sales Uncollected} = \frac{\text{Accounts Receivable}}{\text{Net Credit Sales}} \times 365 \)
Where:
- Accounts Receivable” is the amount of money owed to a company by its customers.
- Net Credit Sales” are the sales made on credit (not including cash sales) during the same period.
The resulting number tells you, on average, how many days it takes for a company to collect payment after a sale has been made.
A lower DSU is generally better, as it indicates that a company can quickly collect its receivables, which can improve its cash flow. This could reflect efficient credit and collections policies and/or prompt payment behavior by the company’s customers.
On the other hand, a higher DSU means that a company takes longer to collect its receivables. This could tie up a company’s cash in receivables and potentially strain its cash flow. It might also suggest issues with the company’s credit policies or collections practices, or that its customers are slow to pay their bills.
As with all financial ratios, DSU should be compared with industry norms and the company’s historical performance to provide meaningful insights.
Example of Days’ Sales Uncollected
Let’s consider a hypothetical example of a company.
Suppose for the current fiscal year, the company reported:
- Accounts Receivable: $200,000
- Net Credit Sales: $1,500,000
We can calculate the Days’ Sales Uncollected (DSU) as follows:
\(\text{DSU} = \frac{\text{Accounts Receivable}}{\text{Net Credit Sales}} \times 365 \)
\(\text{DSU} = \frac{\$200,000}{\$1,500,000} \times 365 = \text{approximately 48.7 days} \)
This means that, on average, it takes the company about 49 days to collect payment after a sale has been made.
To interpret this DSU, the company would need to compare it with its own DSU from previous years, as well as with the DSUs of other companies in the same industry.
For instance, if the industry average DSU is 40 days, this company is taking longer than its competitors to collect its receivables, which could suggest issues with its credit policies or collections practices. On the other hand, if the company’s DSU was 60 days the previous year, the current DSU of 49 days could indicate an improvement in its ability to collect receivables.
