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finance a la shmoop- what is days sales outstanding? okay so this isn't a

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congratulatory missive, like hey you have a lot of sales today [men in suits smile]

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outstanding! no it's nothing like. that day sales outstanding or dsos is a

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balance sheet computation that puts in perspective how well or rather how

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quickly you are collecting the bills you are owed for stuff you have sold. like

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let's say your company pulp friction is selling paper pulp to the newspaper [paper truck]

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industry. gradually week after week month after month quarter after quarter your

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DSOs are creeping upward from the thirty eight days to now fifty three days in

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the course of a few years. well what's going on here

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well if the newspaper industry were financially healthy it would be [doctor examines office building]

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reasonable that they would want to pay their bills on time, but clearly there is

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a trend here. another year goes by and DSOs are now at sixty four days. this is

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a problem people the industry is paying for the pulpit consumes to print on

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paper at a slower rate than they did before. well why well the newspaper [chart shown]

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industry is slowly going broke and they're trying to conserve as much cash

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as they can, by leaning on their vendors to essentially finance them so that they

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you know die more slowly. key takeaway DSOs are a relative number that is in a [equation]

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vacuum, if you just look at one number as a representation of DSOs it doesn't

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really mean anything. dsos have to be taken in context of the

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history of the company itself and in context of whatever the industry average

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is. like maybe the average DSO of a pulp maker is highly seasonal, and each year at [man smiles with sunshine and rain]

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ebbs and flows with the weather. or maybe your particular pulp company was way

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better than the norms and it's just normalizing as DSOs creep back up to the

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industry standard of 64 days. context. alright so the calculation. how do you

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calculate DSO? well it's this just accounts receivable divided by sales [equation]

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made on credit. and if you're inside of a large corporation you can assume that

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all sales are made on credit. it's not like a McDonald's Store where a USA

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Today or The Wall Street Journal walks in hands [ drive through window]

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warehouser the pulp company 14 million dollars in cash for 7,000 tons of pulp.

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think about the equation. its volatile. and it can turn into a quote good

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unquote number quickly by having your pulp [man eats dinner]

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selling business turned sour. like nobody buys from you for a long time and

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everyone pays their bill .well all of a sudden you have a DSO number of like [dump truck knocks man over]

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five, because nobody owes you money in the form of your account receivable. not

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a good situation either again DSOs need context. a huge DSO number can be just

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fine as well all of the sudden China Russia and all [world map]

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of Latin America buy your pulp. you suddenly have a billion dollars in

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accounts receivable and it'll take you months and months and months to fulfill

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those orders. so your dsos then balloon up and look

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bad, well most companies would kill to have this quote bad unquote DSO number. [man is mugged]

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so that's it DSOs are just a relative index of how well you are collecting

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your bills. receivables over sales that's it. outstanding work [equations]

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