Days Sales Outstanding D S O Days Sales Outstanding ADDITIONAL STUDY ASSISTANCE

DAYS SALES OUTSTANDING CRITICAL SECTION GUARANTEED TO BE IN EXAM ALL PEOPLE IN ANY ASPECT OF CREDIT SHOULD KNOW WHAT DSO MEANS!

DSO This measures the NUMBER OF DAYS WORTH OF SALES – that has not yet been paid for. THIS IS NOT JUST based on OVERDUE DEBT – BUT ALL THE DEBTORS

DSO Imagine you allow 30 day date of statement terms This means that you allow 30 days worth of sales by a customer – to be outstanding before payment needs to be made - so – if everyone paid on time - your DSO would be 30 days IF your terms were 60 days – and every one paid on time – your DSO would be 60 days!

collectors performance Therefore We need to measure our DSO to see whether customers are paying according to terms – or not Ie – if the DSO came out at 45 days – and we allowed 30 day terms – then customers would be paying 15 days late. Also used to measure collectors performance

collectors performance Therefore We need to measure our DSO to see whether customers are paying according to terms – or not Ie – if the DSO came out at 45 days – and we allowed 30 day terms – then customers would be paying 15 days late. Also used to measure collectors performance

2 ways to calculate DSO ACTUAL DSO – Roll Back Method Used to measure performance of the creditors own debtors – and it’s staff AVERAGE DSO – Average method Usually used when ASSSESSING a potential customers financial statements when deciding whether to grant credit or not

We will be doing today: ROLL BACK METHOD (Actual) The average method will be discussed later in the course when we do Advanced Credit Assessments

DSO Calculation example Your debtors book total at the end of May is R 3 000.00 Your Sales history over the past months is: Sold in March – R 1000.00 Sold in April – R 1000.00 Sold in May – R 1000.00 What would your DSO be? Lets work it out

DSO Calculation HOW MANY DAYS OF Sales are not yet paid for ? R 3000.00 worth of sales : May – R 1000.00 (31 days in May) April – R 1000.00 (30 days in April) March – R 1000.00 ( 31 days in March) Therefore....this R 3000.00 worth of debt is equal to 92 DAYS worth of unpaid sales The DSO = 92 days

What we did – we used roll back: MAY DEBTORS TOTAL R 3 000.00 MADE UP OF: MAY SALES R 1000.00 31 DAYS APRIL SALES R 1000.00 30 DAYS MARCH SALES ADD THE DAYS = 31 + 30 + 31 DAYS = DAYS SALES OUTSTANDING = 92 DAYS

Now YOU do one November Debtors – R 80 000.00 August Sales – R 25 000.00 September Sales – R 18 000.00 October sales – R 15 000.00 November Sales R 22 000.00

What answer did you get? Is this a good – or bad result? 122 days

compare to terms before Good or bad result.... If TERMS are 30 days – very bad result If Terms are 120 days.... Not bad at all Remember..need to compare to terms before commenting!

How to show the calculation in the exam November Debtors Less November Sales Less October Sales Less September Sales Less August Sales R 80 000 (R 22 000) R 58 000 (R 15 000) R 43 000 (R 18 000) R 25 000 (R 25000) 30 DAYS 31 DAYS TOTAL DAYS = 122 DAYS

Do another one November Debtors – R 185 000.00 August Sales – R 25 000.00 September Sales – R 18 000.00 October sales – R 45 000.00 November Sales R 122 000.00

Did you get the ANSWER 91 DAYS ?

Calculation November Debtors Less November Sales Less October Sales Less September Sales R 185 000 (R 122 000) R 63 000 (R 45 000) R 18 000 (R 18 000) 30 DAYS 31 DAYS TOTAL DAYS = 91 DAYS

Did not need August figures.. What about August? Did not need August figures.. MEANS August Sales Are already paid for........ Only September / Oct & November Sales are outstanding

Calculate November DSO November Debtors – R 46 000.00 August Sales – R 25 000.00 September Sales – R 18 000.00 October sales – R 15 000.00 November Sales R 22 000.00

Hit a Problem?........ Do YOU HAVE ONLY R 9000.00 left to take off September? Generally – ONLY PART of SOME months sales are paid for – leaving ONLY PART of that months sales outstanding (ie in this instance – R 9000 of September sales are paid – and R9000 are left unpaid)

Too much in the next month? DAYS November Debtors November Sales October Sales ONLY R 9000.00 of SEPTEMBER SALES ARE UNPAID R 46 000 R 22 000 R 15 000 30 days 31 days

Transfer this portion to days How many days did it take to sell R9000 in September – if September total sales were R 18000.00? 9000 divided by 18000 multiplied by 30 (30 days in September) = 15 days (half the months sales!)

Calculation November Debtors Less November Sales Less October Sales Less PART of September Sales 9000 X 30 = 15 18 000 R 46 000 (R 22 000) R 24 000 R 9 000 (R 9 000) 30 DAYS 31 DAYS 15 DAYS TOTAL DAYS = 76 DAYS

Try another one December Debtors – R 198 000 August Sales – R 91 000 September Sales – R 95 000 October Sales – R 106 000 November Sales – R 98 000 December Sales – R 72 000

December / November and ANSWER 69 DAYS Unpaid sales are: December / November and PART of October

Try another one December Debtors – R 245 671 August Sales – R 91123 September Sales – R 67 892 October Sales – R 48 101 November Sales – R 78 314 December Sales – R 92 321

December / November / October PART OF SEPTEMBER (11 days) Unpaid are: December / November / October AND PART OF SEPTEMBER (11 days)

NOTE The SALES figure used to calculate DSO MUST INCLUDE VAT If you are given figures that DO NOT include VAT – you would have to add 14% before doing your calculation The DEBTORS figure always has VAT already included

If terms are 30 days Would this have been a good or a bad result? What are some of the REASONS that so many days sales have not been collected?

REASONS Could be: Lazy staff not doing enough collection calls Not enough staff available due to absenteeism Too many debtors – not enough staff members Staff not following required procedures and rules Rules and procedures not in place Rule and procedures are not viable for the creditors market

COMPULSORY TO DO IT! SHOW ALL OF YOUR CALCULATIONS HOMEWORK DSO homework will be emailed to you tomorrow morning – MAKE SURE THAT YOU RECEIVE IT! Bring it back to class with you AT NEXT LECTURE COMPULSORY TO DO IT! SHOW ALL OF YOUR CALCULATIONS