Days sales uncollected, also known as days sales outstanding, is an important financial metric that measures how long it takes a company to collect payment from its credit sales. As a business owner, understanding days sales uncollected can help you better manage your accounts receivable, cash flow, and make more informed decisions about your credit policies. In this article, we’ll break down exactly what days sales uncollected is, how to calculate it, and why it’s so critical for small businesses.
What is Days Sales Uncollected?
Days sales uncollected measures the average number of days it takes a company to collect payment from its customers after a credit sale has occurred It provides visibility into how long cash is tied up in receivables before it’s available to the company,
For example if a company has days sales uncollected of 30 days, it means on average it takes 30 days for the company to collect payments from customers after a sale is made. The lower the days sales uncollected the faster a company is collecting from customers.
Days sales uncollected is a liquidity ratio that helps assess a company’s ability to efficiently turn credit sales into cash flow A higher ratio means customers are taking longer to pay their bills, which can create cash flow issues if the company relies on that cash for operations It can also be an indicator of potential problems with collections procedures or the creditworthiness of customers.
How to Calculate Days Sales Uncollected
The formula for days sales uncollected is:
Days Sales Uncollected = (Average Accounts Receivable / Total Credit Sales) x Number of Days
To break this down:
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Average Accounts Receivable is the average balance of receivables owed to the company over a certain time period. This is found by taking the beginning and ending accounts receivable for the period and dividing by 2.
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Total Credit Sales is the total revenue generated by the company from credit sales over the same time period as used for average accounts receivable.
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Number of Days is the number of days in the time period you are measuring, usually 365 days for a full year.
Let’s look at an example:
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Beginning A/R: $20,000
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Ending A/R: $40,000
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Average A/R = ($20,000 + $40,000) / 2 = $30,000
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Total Credit Sales for the year = $300,000
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Number of Days in Year = 365
Days Sales Uncollected = ($30,000 / $300,000) x 365 = 36.5 days
This company has days sales uncollected of 36.5 days, meaning it takes over a month on average to collect payment from customers.
Why Track Days Sales Uncollected?
Monitoring days sales uncollected is critical for several reasons:
Evaluate liquidity
The longer it takes to collect from customers, the longer cash is tied up in receivables rather than available for other uses. Tracking days sales uncollected helps assess liquidity risk and whether collections is efficient.
Identify potential problems
A sudden spike in days sales uncollected could indicate an issue with collections, credit policies, or customer payment patterns that needs to be addressed.
Improve cash flow management
Knowing the average collection period allows better cash flow planning and forecasting.
Assess credit policies
The collection period metric can help determine if credit terms and limits are too lenient.
Compare to industry benchmarks
Days sales uncollected can be compared to industry averages to see how collection effectiveness stacks up against competitors.
Monitor trends
Looking at historical days sales uncollected patterns enables you to spot positive or negative trends.
What is a Good Days Sales Uncollected?
There is no one-size-fits-all number for what makes a “good” days sales uncollected ratio. The optimal level can vary significantly based on industry, customer payment terms, seasonality, and other factors.
As a very general guideline:
- Under 30 days is considered strong
- 30-45 days is average
- Over 60 days could indicate problems
However, it’s most meaningful to compare your ratio to competitor benchmarks in your specific industry. Monitoring trends in your own days sales uncollected over time is also key.
For example, even if your days sales uncollected is 40 days, if it has increased from 30 days that warrants further investigation into what is causing the slowing collections.
How to Improve Days Sales Uncollected
If your days sales uncollected is higher than you’d like, here are some strategies to help improve it:
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Review credit policies – Extending too much credit or lenient terms could allow customers to delay payments. Consider tightening credit limits or shortening terms.
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Offer payment incentives – Discounts for early payment or accepting credit cards can help prompt faster customer payment.
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Improve billing processes – Ensure invoices are accurate and sent promptly. Automate reminders about unpaid invoices.
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Outsource collections – Collections agencies can help recover overdue accounts for a fee.
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Accept online payments – Options like PayPal, Stripe, Square make it easier for customers to pay.
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Build relationships – Strong customer relationships can increase willingness to pay on time.
The Bottom Line
Monitoring days sales uncollected provides valuable visibility into how efficiently your business is collecting from customers and converting sales into cash flow. Keeping an eye on trends and benchmarks for your ratio enables you to spot potential issues early and take action to optimize your credit policies, billing processes, and collection procedures. While numbers will vary by industry, striving for a shorter days sales uncollected ultimately helps improve liquidity and cash flow.
Example of DSI
The leading retail corporation Walmart (WMT) had inventory worth $54.9 billion and cost of goods sold worth $490 billion for the fiscal year 2023. DSI is therefore:
While inventory value is available on the balance sheet of the company, the COGS value can be sourced from the annual financial statement. Care should be taken to include the sum total of all the categories of inventory which includes finished goods, work in progress, raw materials, and progress payments.
Since Walmart is a retailer, it does not have any raw material, works in progress, and progress payments. Its entire inventory is comprised of finished goods.
Special Considerations
One must also note that a high DSI value may be preferred at times depending on the market dynamics. If a short supply is expected for a particular product in the next quarter, a business may be better off holding on to its inventory and then selling it later for a much higher price, thus leading to improved profits in the long run.
For example, a drought situation in a particular soft water region may mean that authorities will be forced to supply water from another area where water quality is hard. It may lead to a surge in demand for water purifiers after a certain period, which may benefit the companies if they hold onto inventories.
Irrespective of the single-value figure indicated by DSI, the company management should find a mutually beneficial balance between optimal inventory levels and market demand.
Days Sales Uncollected (Outstanding) Ratio | Financial Accounting
What is days’ sales uncollected?
What is Days’ Sales Uncollected? Home › Finance › Financial Ratio Analysis › What is Days’ Sales Uncollected? Definition: The days’ sales uncollected ratio is a liquidity ratio used by creditors and investors to estimate how many days before the company will collect their accounts receivable.
How do you calculate days sales uncollected?
It is calculated by dividing average accounts receivable by the net sales and multiplying the result with the total number of days in a year. What Is Days Sales Uncollected? The days’ sales uncollected is an essential ratio for the company’s investors and creditors. It determines the days the company may obtain the cash for its sales.
What is days sales uncollected (DSU)?
Share This 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.
What is days’ sales uncollected ratio?
Definition: The days’ sales uncollected ratio is a liquidity ratio used by creditors and investors to estimate how many days before the company will collect their accounts receivable. In other words, the days’ sales uncollected ratio measures how long it will take for the customers to pay their credit card balances.
