The dark green line segments emphasize the sales for the most recent quarter for the two different growth rates. As soon as we switched to the longer period, our collection performance looked terrible, as this figure illustrates. Then word came down that AR collection statistics were to be calculated using annual rather than quarterly averages.

We were growing at about 100% per year, compared with 20% for our parent, and I’d been basing our DSO reports on average sales over the prior three months. But as I learned many years ago, the standard DSO metric is worse than useless.Īt the time, I was the controller of a small company that had recently been acquired by a public company, and we had to change our reporting practices to satisfy our new parent. Supposedly, by tracking the measure month after month, you see the trend in how your customers are paying their bills. This calculation is intended to give you the average number of days it takes to collect your invoices. Typically, it’s found by dividing your Accounts Receivable balance by average daily sales. The measure you probably use is the “accounts-receivable collection period,” also called the “Days Sales Outstanding in Receivables” (DSO). Using the method is like measuring precision machinery with a rubber band.

Unfortunately, the traditional way to measure AR performance is badly broken. During tough economic times it’s particularly important to manage your Accounts Receivable balance carefully.

Dso calculation template excel