Days sales outstanding

Days sales outstanding or DSO is probably one of the most critical performance metrics in the debt collection process. It indicates an average number of days that a company takes to collect revenue after a sale has been made. Regular DSO requires three numbers: total accounts receivable, total credit sales for the period analyzed, and the number of days in the period. Days sales outstanding is calculated as:

Dayssales outstanding = Accounts receivable \ Total credit sales for the period * Number of days in the period.

A low DSO number means that it takes a company fewer days to collect its accounts receivable, while a high DSO number shows that a company is selling its product or services to customers on credit - essentially a free loan - and taking longer to collect money.

Receivable turnover

Also known as accounts receivable turnover ratio the receivables turnover ratio is basically the ratio between the total sales made with the help of credit and the average amounts that are receivable. The receivables turnover ratio is calculated as follows:

Accounts ReceivableTurnover = Net Credit Sales / Average Accounts Receivable

The accounts receivable turnover can be used to show the financial strength of a company to prospective investors. The accounts receivable turnover report demonstrates the average amount of time that passes before a payment is received from each client, as well as showing an overall average for the entire client base. While nobody expects the turnover to match the exact terms of payment, many investors will consider it a big plus if the accounts receivable turnover data indicates an overall average of less than a week from the stated terms of payment.

Inventory turnover ratio

An inventory turnover ratio is an asset turnover ratio or rather a percentage that depicts the monetary relationship between sales and the inventory. The inventory turnover ratio is a cost accounting concept that depicts the total number of times the inventory is sold during one accounting year.

The inventory turnover ratio is calculated by the dividing Total cost of sold goods by the Average inventory of the period.

Inventory Turnover Ratio = Total cost of sold goods (sales) / Average inventory of the period.

There are several things to keep in mind when calculating turnover rates: