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Days Sales Outstanding (DSO) | Formula | Example and Calculation - YouTube
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clicking the bell icon friends today we
are going to learn a topic that is :
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days sales outstanding that's called DSO
will be learning formulas will be
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learning examples on the same so let's
get started with us see if you are a
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business owner you would know that your
days that is DSO is one of the most
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important part of the cash conversion
cycle which is also known as your CCC
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so in this tutorial discuss the days
of the sales outstanding in a complete
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detailed fashion but this is the graph
basically that I want to show you for
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Colgate and PNG see when a company sells
its product to another company they say
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they sell a major share major share of the
products on credit sometimes the same
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cent percent share so and then after certain period of time the company collects the
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money from debtors days sales
outstanding the DSO is the calculation
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that shows how good a company is in
collecting its dues from its debtors so
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let us look at the graph over here and
we know that the Colgate's days sales
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outstanding has been decreasing
continuously and is currently at
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34.09 that's 34
days on the other hand Proctor Procter
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and Gamble's days sale outstanding has
been moving up continuously and is
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currently lower than Colgate鈥檚 its ratio o
Colgate鈥檚 days is 25.15
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days
now let's look at the basis outstanding
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formula the days sales outstanding
formula goes something like this DSO
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is equal to your accounts receivables
divided by the net credit sales this
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hole in two will multiply with 365
so the decent is outstanding
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interpretation that's the next thing
that we are going to do now in the above
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Days sales outstanding formula you can you know see that the accounts receivables
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that is the first thing the AR are being
proportioned with let credit sales
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right and the accounts receivables are
the amount due from the debtors and the
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net credit scenes can be calculated as
something follow the net credit sales
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is equal to your gross credit sales
less any sales returned if any or
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discount I'll just use / and say
discount so net credit sales less sin
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certain or discount and then the
proportion is being multiplied with the
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365 is to see the overall impacted in
here so what what the days of sales
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outstanding formula is depicting see
it's depicting that how much you can see
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how much money has already been
collected already being collected and
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how much
is yet to be received
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so understanding this will give an
investor an idea how good a company is
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in collecting its money due from its
debtors and we would be able to judge the
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efficiency of the collection as well the
point is days sales outstanding DSO
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helps us to decide how long it takes for
the company to collect the money from
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its status and the number of days is
added to the days inventory outstanding
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so the Days inventory outstanding helps
us to understand how long it takes to
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transfer to transfer the days is inventory
outstanding DIO helps us to
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understand how long it takes to transfer
the raw material into the finished goods
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so and then from the days payable
outstanding the DPO that's the third
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thing is deducted so the DPO tells us
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that how long it takes for the company
to pay off its creditors right so let's
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take these scenes outstanding example
outstanding example so let's say there
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is come me called zing limited and it
has a credit sales over here let's say
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it has credit sales of 5 lakh okay
in a year and it had sales returned as
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SR let's say 50000 so it
had account receivable a are also at
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standing at $90,000 so what we need to
find is the DSO over here to DSO so
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in this example first we need to find
out the net credit sales then the gross
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credit sales which are given so the net
credit sales who is going to be your
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credit sales divided by your sales
return is going to be your net credit
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sales in CS right 450000 and we
also have been given with the account
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receivable as 90,000 right so we need to
put this into the DSO formula and should
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be as simple as that
the Days sales outstanding is your account
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receivable that is your AR 90,000
divided by 4,50,000 this multiplied
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by 365 so just multiply this by 365 days
which gives you 73 days this means that
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Companies Inc takes 73 days to collect
the money from its debtors on an average
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okay
I hope you are getting it
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what I'm trying to say let's take
another example find out the day's
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inventory outstanding that is the
day's payable outstanding the DPO so that
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and and we also need to find the DSO in
this particular example and calculate
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these CC triple CCC the cash conversion
cycle so we will first compute the three
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important part of the cash conversion
cycle and then we will ascertain how
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many days it takes to complete the cash
conversion cycle of zing we will first
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look at each formula and put in the data
to find out the ratio the formula for
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the DIO the days inventory outstanding
is going it to be your ending inventory
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right your ending inventory divided by
the cost of sales this whole into 365
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days right so putting the data into the
formula we get something like this is
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equal to
do we have inventory over here let's say
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the inventory is 30,000 okay
and your cost of sales is let's say
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3,00,000 so this you will multiply
with 365 so our final
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answer is going to be
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into 365 over 0.21 into 365 so 36.5 days
right now let's find the DPO that is Days
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is payable outstanding so the DPO is
going to be let's say because the
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formula for the DPO is is as simple as
that we just try to analyze let's say
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the amount is $60,000 divided by $300,000 into 365
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just multiply this to so you will get 73
days and finally the formula for the
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days sales today sales outstanding
is the accounts receivable AR divided by
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the net credit sales into 365 so putting
the data into the same we get something
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like this
$60,000 divided by $300,000 okay this whole
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in to 365 days right so we get how much
73 days 60,000 divided by $360,000
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so we get how many 60.83 days so now we look at the formula
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of the cash conversion cycle or a cash
conversion cycle that is triple CCC of the
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company is going to be how much
your DSO
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Plus DIO - DPO so 24.33
three days so 24 days is your cash
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conversion cycle so since the company
takes more time to pay off its creditors
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quickly collects the money from its
debtors and translates the wrong button
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to finish goods into short period time
it is able to create the cash conversion
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cycle which is just 24.33
and it's good thing so from the point of
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view of the efficiency it's a great
achievement because the cash flow you
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can see the cash flow is the lifeblood
of any business so and from the
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calculation above it is evident that the
company zhang has been doing quite well
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in completing the full conversion cycle
of the cash conversion cycle within a
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very short times p or the short period
of time
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now on the final note let me show you
let me tell you one thing the net credit
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sales - how to calculate the days sales
I'm studying if you're if you're new to
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investment you may wonder how you would get the data of the accounts in Receivables
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and net credit sales so in this you know
part I'll I'll show you how to do that
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see all you need to do is you need to
find the financial statement that is
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your balance sheet and the P&L of the
company right and in the balance sheet
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part you would be able to locate the
accounts receivable right in the balance
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in the balance sheet you will get
accounts receivable part and you need to
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look in the asset sections where the
current assets are given under the
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current assets you will get the data for
accounts receivable and incase of the
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income statement that is the P & L okay
you will get the data for the net credit
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sales in CS and at the beginning of the
income statement you would see the cross
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sales so the gross sales includes both
the cash in the credit sales and you
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would you need to pick up the credit
sales and you also need to deducted this
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sales if any from the credit sales if
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