metrics explained

Accounts Receivable Turnover Ratio vs Days Sales Outstanding: What's the Difference?

When it comes to managing a business's finances, it's important to understand and keep track of a variety of different metrics. Two of the most important metrics in this area are the accounts receivable turnover ratio and days sales outstanding (DSO).

While these two metrics may seem similar at first glance, they actually measure different things and provide different insights into a business's financial health. In this article, we'll take a closer look at the accounts receivable turnover ratio and DSO, and explain the key differences between them.

What is the Accounts Receivable Turnover Ratio?

The accounts receivable turnover ratio (also known as the receivables turnover ratio) is a metric that measures how effectively a business is collecting on its receivables. This ratio is calculated by dividing a business's total sales by its average accounts receivable. The resulting number is then multiplied by 365 to get the number of days it takes, on average, for the business to collect on its receivables.

For example, let's say a business has total sales of $100,000 and an average accounts receivable of $10,000. The receivables turnover ratio would be calculated as follows:

Receivables turnover ratio = $100,000/$10,000 = 10

This business, on average, takes 10 days to collect on its receivables. The lower the receivables turnover ratio, the longer it takes the business to collect on its receivables.

What is Days Sales Outstanding?

Days sales outstanding (DSO) is a metric that measures the average number of days it takes a business to collect on its receivables. This metric is calculated by dividing a business's accounts receivable by its sales, and then multiplying the result by 365.

For example, let's say a business has total sales of $100,000 and accounts receivable of $10,000. The DSO would be calculated as follows:

DSO = $10,000/$100,000 = 0.1

This business, on average, takes 36.5 days to collect on its receivables. The higher the DSO, the longer it takes the business to collect on its receivables.

Key Differences Between Accounts Receivable Turnover Ratio and Days Sales Outstanding

Now that we've explained what the accounts receivable turnover ratio and DSO are, let's take a look at the key differences between them:

  • The accounts receivable turnover ratio measures how many times a business's receivables are turned over in a given period of time, while DSO measures the average number of days it takes to collect on receivables. The receivables turnover ratio is a measure of efficiency, while DSO is a measure of how long it takes to collect on receivables.
  • The receivables turnover ratio is calculated by dividing a business's total sales by its average accounts receivable, while DSO is calculated by dividing a business's accounts receivable by its sales. This means that the receivables turnover ratio takes into account a business's sales, while DSO does not.
  • The receivables turnover ratio is affected by a business's sales, while DSO is not. This means that a business with higher sales will have a higher receivables turnover ratio, all else being equal. DSO, on the other hand, is not affected by sales and is only a function of the accounts receivable.

Conclusion

The accounts receivable turnover ratio and DSO are two important metrics for measuring a business's financial health. While these metrics may seem similar at first glance, they actually measure different things. The key difference between the two is that the receivables turnover ratio measures how many times a business's receivables are turned over in a given period of time, while DSO measures the average number of days it takes to collect on receivables.

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