Days sales outstanding

Days sales outstanding is trade receivables divided by revenue for the period, multiplied by the days in the period. Revenue is the right denominator because a receivable is recorded at the invoiced selling price, so a cost based denominator would overstate the days. Some practitioners use credit sales rather than total revenue where cash sales are material, which is more precise and only works if the disclosure supports it.

It measures two different things at once and separating them is the analytical value. It measures the terms the company grants, which is a commercial decision, and it measures whether customers actually honour them, which is a collections and credit quality question. A rise driven by longer agreed terms is a pricing concession in disguise. A rise driven by slow payment is a receivables quality problem heading toward a bad debt charge.

It is also the component most easily flattered. Selling receivables to a bank, whether described as factoring or securitisation, removes them from the balance sheet and cuts the days without a single customer paying faster. Where the arrangement is genuinely without recourse the derecognition is correct, but the improvement is financing rather than operations and belongs in the discussion either way.

In a diligence context the ageing profile matters more than the average. A stable ninety day figure made up of customers paying at ninety days is a different business from the same average produced by most customers paying at thirty and a large one paying at two hundred.