BOOKKEEPING

Settling Accounts

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Charles W. Kyd is wrong in assessing blame for bad accounts receivable information (Finance: "Formula for Disaster?," November 1986). The fault is in the method of calculation of the "days sales outstanding in receivables" (DSO) formula. In his example, the DSO calculation used an average sales figure without using an average receivable figure. That's like comparing apples to oranges.

DSO can be extremely useful to all businesses if calculated as follows:

average receivables over 12 months / average sales over 12 months X 30.417 days

The figure 30.417 represents the average number of days per month.

DSO is not a formula for disaster unless it's calculated by a disastrous formula!

Charles W. Kyd replies: I've gained 20 pounds over the past year. But my average monthly weight during this time is 10 to 15 pounds less than that. By Mr. Schoen's calculations, I won't have to buy a larger belt for another six to eight months.

Seriously, as an overeater, I step on the scales to find out what my weight is today. As a manager, I need a similar measure of the current performance of accounts receivable. In both cases, a year's average unnecessarily distorts the magnitude of today's bad news.

Last updated: Mar 1, 1987




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