Bad Debt Reserve

finance a la shmoop- what is days sales outstanding? okay so this isn't a

congratulatory missive, like hey you have a lot of sales today [men in suits smile]

outstanding! no it's nothing like. that day sales outstanding or dsos is a

balance sheet computation that puts in perspective how well or rather how

quickly you are collecting the bills you are owed for stuff you have sold. like

let's say your company pulp friction is selling paper pulp to the newspaper [paper truck]

industry. gradually week after week month after month quarter after quarter your

DSOs are creeping upward from the thirty eight days to now fifty three days in

the course of a few years. well what's going on here

well if the newspaper industry were financially healthy it would be [doctor examines office building]

reasonable that they would want to pay their bills on time, but clearly there is

a trend here. another year goes by and DSOs are now at sixty four days. this is

a problem people the industry is paying for the pulpit consumes to print on

paper at a slower rate than they did before. well why well the newspaper [chart shown]

industry is slowly going broke and they're trying to conserve as much cash

as they can, by leaning on their vendors to essentially finance them so that they

you know die more slowly. key takeaway DSOs are a relative number that is in a [equation]

vacuum, if you just look at one number as a representation of DSOs it doesn't

really mean anything. dsos have to be taken in context of the

history of the company itself and in context of whatever the industry average

is. like maybe the average DSO of a pulp maker is highly seasonal, and each year at [man smiles with sunshine and rain]

ebbs and flows with the weather. or maybe your particular pulp company was way

better than the norms and it's just normalizing as DSOs creep back up to the

industry standard of 64 days. context. alright so the calculation. how do you

calculate DSO? well it's this just accounts receivable divided by sales [equation]

made on credit. and if you're inside of a large corporation you can assume that

all sales are made on credit. it's not like a McDonald's Store where a USA

Today or The Wall Street Journal walks in hands [ drive through window]

warehouser the pulp company 14 million dollars in cash for 7,000 tons of pulp.

think about the equation. its volatile. and it can turn into a quote good

unquote number quickly by having your pulp [man eats dinner]

selling business turned sour. like nobody buys from you for a long time and

everyone pays their bill .well all of a sudden you have a DSO number of like [dump truck knocks man over]

five, because nobody owes you money in the form of your account receivable. not

a good situation either again DSOs need context. a huge DSO number can be just

fine as well all of the sudden China Russia and all [world map]

of Latin America buy your pulp. you suddenly have a billion dollars in

accounts receivable and it'll take you months and months and months to fulfill

those orders. so your dsos then balloon up and look

bad, well most companies would kill to have this quote bad unquote DSO number. [man is mugged]

so that's it DSOs are just a relative index of how well you are collecting

your bills. receivables over sales that's it. outstanding work [equations]