This ratio (also called Average Collection Period) is used to estimate the length of time between when a sale is made and when it is converted into cash (i.e. how long sales remain in accounts receivable). While this figure is only an estimate, it indicates how quickly customers pay their bills and can highlight potential problems if it is increasing.
In general, a healthy organization will want to minimize or decrease their Days of Sales Outstanding since they would be more quickly converting their sales into cash.
Note that the accounts receivable at the start of the year is typically obtained from using the figure at the end of the previous year. Also, this calculator uses a 365 day year--some prefer to calculate this based on a 360 day year.
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