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DSO ratio = accounts receivable / average sales per day, or DSO ratio = accounts receivable / (annual sales / 365 days) Accounts receivable refers to the outstanding balance of accounts receivable at a point in time here whereas average sales per day is the mean sales computed over some period of time.
Days in inventory (also known as "Inventory Days of Supply", "Days Inventory Outstanding" or the "Inventory Period" [1]) is an efficiency ratio which measures the average number of days a company holds its inventory before selling it. The ratio measures the number of days funds are tied up in inventory.
Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit. In most business entities, accounts receivable is typically executed by generating an invoice and either mailing or electronically delivering it to the customer, who, in turn, must pay it within an established timeframe, called credit terms [citation needed] or payment terms.
A good accounts receivable turnover depends on how quickly a business recovers its dues or, in simple terms how high or low the turnover ratio is. For instance, with a 30-day payment policy, if the customers take 46 days to pay back, the Accounts Receivable Turnover is low.
Another insight provided by the inventory turnover ratio is that if inventory is turning over slowly, then the warehousing cost attributable to each unit will be higher. [3] Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low.
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The average collection period (ACP) is the time taken by businesses to convert their accounts receivable (AR) to cash. Credit sales are all sales made on credit (i.e. excluding cash sales). A long debtors collection period is an indication of slow or late payments by debtors.
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