The common measurement for a company's collection ability is the ratio of debtors to turnover (giving a figure for the number of days to convert sales into cash).
There are a number of ways to obtain a DSO figure: the most common is the 'count back' method. The principal is to start with your total debtor figure, then deduct the latest months sales figure, then the month before that, until you have used the whole of your debtor figure (got it?). Hopefully the following will help to explain how to arrive at a DSO figure:
Debtors, end April £460,000 – using a 30 day month
|
Month
| Sales
| DSO
| Count Back
| Debtors
| -
| -
| 460,000
| April
| 200,000
| 30/30
| 260,000
| March
| 230,000
| 30/30
| 30,000
| February
| 210,000
| 4/30
| -
| Totals
| -
| 64 DSO
| -
|
The figure of 30/30 is achieved when a full months sales can be deducted from the debtor balance, as with April and March above.
To achieve the figure of 4/30: divide the February Sales (£210,000) by 30 (the days in the month), to give you £7,000. Take the difference of the cumulative figure of March (£430,000) from the debtor total (£460,000) to give you £30,000. Divide the £30,000 by the £7,000 to give you 4 (4.28 to be exact).
The number of days you use to calculate a DSO figure is up to you. You can use the exact number of days in each month, 28, 31, 30 etc. or, just the working days, say 20 days each month. What you must do, is to use the same method for historic matching. Using 30 days is a good method.
By using a 30 day method you can easily calculate an annual DSO, or easily read another companies DSO from a set of accounts, as follows:
Annual total Debtors x 360, divided by annual Turnover =? Annual DSO
Annual Accounts
Total Debtors £ 36,000 (x 360 = 12,960,000)
Turnover/Sales £360,000 (12,960,000 / 360,000 = 36 DSO)
On-line Company Reports contain detailed analysis of company performance and will aid you in calculating and analyzing a companies DSO. (www.e-company-reports.com)
A good DSO figure is one that is considered good for your industry. Some industries have 60, 90, or even 120 day payment terms. To find out what your industry average is contact a credit reference agency for good, up to date information. The following is a guide if you use 30 days as a payment term.
| Very Good | Good | Fair/Poor | Poor | | under 45 days | 46 - 59 | 60 – 74 days | over 75 days |
If you have not already tried our free sotware, it is available to download at: www.bizstart24.co.uk which will provide you with a full working DSO of the above plus more. |
