DSO Calculation

Why does DSO use Sales (excluding VAT) and Accounts Receivable (including VAT)

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Hello all,

Please can someone clarify why calculating DSO uses a credit sales figure (from income statement) that excludes VAT and an accounts receivable figure (from balance sheet) that excludes VAT? Surely, this skews any results?

e.g. net credit sales £100k (exc. VAT) / accounts receivable £120k (inc. VAT) = 304.17, in this simple example, isn't the answer 365?

Thank you

Replies (8)

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paddle steamer
By DJKL
03rd Dec 2023 15:11

Because if say an external analyst the person calculating does not have the net debtors or the gross turnover, and whilst he/she might assume all sales are standard rated convention seems to have become using the available accounts figures notwithstanding the skewed results (as your example demonstrates)

Basically what is readily available is used.

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Replying to DJKL:
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By Simon Templar
03rd Dec 2023 16:30

Hi,
Really appreciate your response.
Thanks

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By Ruddles
03rd Dec 2023 15:36

Who says that you use the figures suggested? If I were doing the calculations, if assuming debtors were VAT-inclusive I would apply VAT to turnover, or take the net debtors figure. (Your question doesn’t really make sense - so I assume that you meant to refer to VAT-inclusive balance sheet amounts?)

BTW, in your simple example the answer, adopting your net/gross treatment, would be 438.

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Replying to Ruddles:
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By David Ex
03rd Dec 2023 15:42

Ruddles wrote:

BTW, in your simple example the answer, adopting your net/gross treatment, would be 438.

Think the answer is fire the credit controller!

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By paul.benny
03rd Dec 2023 15:52

Yes, the calculation is inconsistent.

But for most purposes the month-on-month trend and/or the DSO relating to other businesses is more informative than the absolute figure.

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Replying to paul.benny:
By Ruddles
03rd Dec 2023 15:55

+1

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Replying to paul.benny:
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By Simon Templar
03rd Dec 2023 16:29

Hi,
Many thanks; much appreciated!

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Routemaster image
By tom123
04th Dec 2023 08:50

I agree with DJKL, in that, exernally, you would use what is available.

Modern software (in house) can report days taken to pay by individual customers - which is a more important measure when collecting.

After all, a month of bumper sales can "reduce" the aged debt column (in DSO terms), despite no money being collected.

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