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Days Delinquent Sales Outstanding
Days Sales Outstanding (DSO) is an important financial metric for evaluating the effectiveness of converting credit sales into cash. Days Sales Outstanding, or DSO, is calculated as: Total Outstanding Receivables at the end of the period divided by Total Credit Sales for the period, times the number of days in the period analyzed. That is:
DSO = (Receivables/Sales) x Days in Period
I believe that analysis of changes in Days Delinquent Sales Outstanding (DDSO) is a good way to measure the credit department’s effectiveness. Changes in DDSO are influenced by the skills of the department in the areas of setting appropriate credit limits, managing risk, and following up when accounts become delinquent.
DDSO focuses on past due balances by identifying the number of days sales represented by delinquent balances. For example, if your DSO was 38 days and the best possible DSO was 30 days, DDSO would be eight days.
Tracking changes in DDSO month to month is a good way to monitor the performance of the credit department because the credit manager can and does influence the size of past due balances. DDSO is an easy concept to grasp. A lower DDSO is better than a higher DDSO. Most importantly, DDSO is relevant to the job the credit department performs day-in and day-out.
Here is the methodology used to calculate DDSO:
Step 1. Calculate DSO
Step 2. Calculate Best Possible DSO using this formula:
Average Current A/R Balances for the Last 3 Months x 90 / Credit Sales for Last Three Months
Step 3. Subtract the answer in Step 2 from that of Step 1 to get the number of days delinquent or DDSO
© 2010. Michael C. Dennis. All Rights Reserved. Michael is the author of "Credit and Collection Handbook." E-mail questions or comments to him at mcdennis13@yahoo.com