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Yuck, that didn't come out right, lemme try again:

Days Sales Outstanding is a measure of how many days worth of sales the current accounts receivable (A/R) represents. It is a way of transforming the accounts receivable number into a handy metric that can be compared with other companies in the same industry to determine which player is managing its receivables collection better. A company with a lower amount of days worth of sales outstanding is getting its cash back quicker and hopefully putting it immediately to use, getting an edge on the competition. To figure out DSO, you first have to figure out Accounts Receivables Turnover. This is:

Sales for period
----------------------- = A/R Turnover
Average A/R for period

Sometimes you will only be able to get the accounts receivable from the last fiscal year, and therefore will have to use the revenues from the last fiscal year. However, the fresher the information, the better. What this ratio tells you is how many times in a year a company turns its accounts receivable. By "turn," I mean the number of times it completely clears all of the outstanding credit. For this number, higher is better. To turn this number into days sales outstanding, you do the following:

Current accounts receivable
-------------------------------- = DSO
Sales for period divided by days in period

This tells you roughly how many days worth of sales are outstanding and not paid for at any given time. As you might have expected, the lower this number is, the better it is for the company. By comparing DSOs for various companies in the same industry, you can get a picture of which companies are managing their credit better and getting money in faster on their sales. This is a crucial edge to have because money that is not tied up in accounts receivable is money that can be used to grow the business.

I'm confused by what he (TMFTemplr) means in the DSO ratio calculation by "Current accounts receivable". Does he mean the entry of the same name on the balance sheet, or the A/R Turnover he calculated the paragraph before? I would think the Turnover, since he said it was needed to calculate the DSO.


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