Days Delinquent Sales Outstanding

Definition

The term days delinquent sales outstanding refers to a metric that allows an investor-analyst, or a management team, to understand the average number of days sales are outstanding for delinquent customers. The calculated rate, expressed in days, takes the average accounts receivable for those accounts that are delinquent and divides it by the amount of sales revenue associated with those accounts occurring in one day.

Calculation

Days Delinquent Sales Outstanding = Average Accounts Receivable for Delinquent Accounts / (Annual Revenue for Delinquent Accounts / 365)

Where:

  • Average accounts receivable for delinquent accounts is an average over the last 12 months or prior year only for those accounts that are not paying on time. The important point is the timeframe should be the same as that used for annual revenue and should NOT include all credit customers.
  • Note that the metric is stated in calendar days, not business days.

Explanation

Liquidity measures allow the investor-analyst to understand the company's long term viability in terms of fiscal health. This is usually assessed by examining balance sheet items such as accounts receivable, use of inventory, accounts payable, and short-term liabilities. One of the ways to understand how quickly customers are paying for items purchased on credit is by examining the company's days delinquent sales outstanding.

Calculating the days delinquent sales outstanding allows the investor-analyst, or a company's management team, to understand the effectiveness of a company's collection practices as well as their credit policies. Unlike days sales outstanding, which provides the average payment timeline for all credit accounts, the days delinquent sales outstanding removes from the calculation the sales associated with customers that are paying on time and focuses on the timeframe it takes for delinquent accounts to finally pay their bills.

Example

Company ABC's CFO would like to dive deeper into the company's credit policy. Following an analysis showing days sales outstanding at 36.5 days, she'd like to focus on delinquent accounts, to better understand their payment pattern. Presently, the company allows customers to repay sales on credit in 30 days, so she's hoping the value is no higher than 60 days for delinquent accounts. Her team of analysts examined data for the last twelve months and found the starting balance of accounts receivable balance for delinquent accounts to be $3,389,000 and the ending balance $4,032,000. Total sales revenue in the same timeframe for delinquent accounts was found to be $23,164,000. Using this information CFO's analyst team calculated average days delinquent sales outstanding as:

= (($3,389,000 + $4,032,000) / 2) / ($23,164,000 / 365)
= ($7,721,000 / 2) / $63,463
= $3,860,500 / $63,463, or 60.8 days

The CFO was alarmed at this value, since it's more than double the time allowed per the company's credit policy. She asked her team to take a look at each delinquent account in this group and determine if the sales team should reach out to the account or deny credit in the future.

Related Terms

sales to inventory ratio, accounts receivable to sales ratio, average receivable collection period, accounts receivable forecast