Days sales outstanding

How long customers take to pay, on average - receivables divided by revenue, times 365.

Example

Northgate's 790,000 over 4,200,000 times 365 is 68.7 days, against 58.4 days the year before.

Important

A lengthening collection period is often the earliest visible sign of a commercial problem: customers pay more slowly when they are struggling, or when they are unhappy with what they received.

Related terms

• Accounts receivable — Money owed to the business by customers who have been invoiced and have not yet paid. Also called trade debtors.
• Cash conversion cycle — The number of days between money leaving the business to buy or make something and money arriving from the customer who bought it. Days of receivables plus days of inventory minus days of payables.
• Working capital — The money tied up in ordinary trading. The operating version - receivables plus inventory minus payables - excludes cash and borrowings, and is the one that behaves like a use of money.

Lessons that explain it

• Red flags: the signals that mean slow down — A red flag is not a reason to stop. It is a reason to stop moving at the speed you were moving, and to go and find out which of two explanations is the true one. (11 min)
• A growing company can run out of cash while its revenue rises — How customers pay and how quickly they pay changes cash needs. Diligence checks billing terms, receivables and working capital, not only revenue and profit. (10 min)
• Working capital: the cash growth eats — Between selling something and being paid for it, a business funds the gap out of its own pocket. Working capital is the size of that gap, and it is why growing companies run out of money. (11 min)
• When the cash and the profit disagree, believe the cash — Most accounting problems show up as a widening gap between reported profit and cash collected. A few ratios, tracked over time, catch the common ones. (12 min)

All 578 terms in the Investing glossary