This shows how long that the company take to get back its accounts receivables. A lower time period would indicate that a company is more efficient in collecting its debt and that a company relies mainly on cash and is efficient in assigning credit.
The industries in which average collection period – the median amount of time necessary for a business to recover its receivables – is most important are those in which receivables make up the greatest portion of cash flows. These industries include banks and financial institutions, car dealerships, retail, construction and professional services. However, there are many other industries for which it is important.
Days sales outstanding is most useful when compared to the standard number of days that customers are allowed before payment is due. Thus, a DSO figure of 40 days might initially appear excellent, until you realize that the standard payment terms are only five days. DSO can also be compared to the industry standard, or to the average DSO for the top performers in the industry, to judge collection performance.
A combination of prudent credit granting and robust collections activity is indicated when the DSO figure is only a few days longer than the standard payment terms. From a management perspective, it is easiest to spot collection problems at a gross level by tracking DSO on a trend line, and watching for a sudden spike in the measurement in comparison to what was reported in prior periods.
The following webpage allows for calculation of A/R collection with comparison to industry- specific norms.