Question

The following is a Company's Days of Sales outstanding. In 1 or 2 paragraphs, explain/interpret what this means:

Days of Sales Outstanding (Debtor Days)

27.77

29.62

27.59

26.40

27.91

31.72

30.68

31.29

30.52

32.85

32.21

Answer 1

The day’s sales outstanding are calculated dividing 365 days by accounts receivable turnover. The accounts receivable turnover is the number of times the average accounts receivable is getting rotated in business. It is calculated dividing net credit sales by average accounts receivable. The days sales outstanding indicates the number of days the customers are taking to pay the dues on account of credit sales to them. The credit granted to customers should be in line with credit policy of the firm.

In the given case the firm is having almost same days of sales outstanding over a period of time. The firm is maintaining uniform credit policy and all customers must be paying dues on time because there is no significant variation in the day’s sales outstanding.

The day’s sales outstanding are part of operating cycle of the firm. The operating cycle is the period involved in purchase of raw materials and converting them into finished goods and selling them to customers and finally getting the money from customers. A lower day’s sale outstanding is preferred since it will reduce the operating cycle period. A lower operating cycle is needed for lower working capital requirements.

Day’s sales outstanding can be improved by following ways

· Having a good collection policy for collection of accounts receivable

· Doing a cost benefit analysis of discount to be offered vs. the early collection of receivables balance

· Reducing the average balance of accounts receivable