The days sales outstanding ratio, also referred to as the normal collection period or times sales in receivables, measures the number of days it takes a company to collect cash from its credit sales. This calculation shows the liquidity and efficiency of a company’s collections department.
In other words, it shows how well a company can collect cash from its customers. The sooner cash is collected, the sooner this cash is used for other operations. Both liquidity and cash flows boost with a lower days sales outstanding measurement.
The ratio is calculated by dividing the ending accounts receivable by the total credit sales for the period and multiplying it by the number of days in the period. Most often this ratio is calculated at year-end and multiplied by 365 days.