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  1. 040Receivables are Rs 300 crore at quarter end and revenue for the quarter was Rs 450 crore. A junior analyst reports days sales outstanding of 243 days. What went wrong, and what is the right figure?Working capital and cash riddlesWarm upCorporate FP&ABig Four

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    What is the right DSO?

    Show the worked solution

    The right DSO is about 61 days; the junior set a quarter's revenue against a full year of days. DSO is receivables over revenue times the days in the same period. Either annualise revenue, 450 x 4 = 1,800, giving 300 / 1,800 x 365 = 60.8 days, or keep the quarter and multiply by its 91.25 days. The 243 is exactly four times too large.

    What does DSO actually measure?

    Think of a tailor who sells Rs 1,000 of clothes a day and is owed Rs 30,000 by customers. Customers are, on average, 30 days behind. DSO is receivables divided by revenue per day, so the revenue and the day count must come from the same period. Rs 450 crore over a quarter is about Rs 4.93 crore a day, and Rs 300 crore of receivables is about 61 days of that.

    The error: a quarter's revenue set against a year's daysQ3 working capital note (draft)Trade receivables, quarter endRs 300 croreRevenue, three monthsRs 450 croreDSO = 300 / 450 x 365 = 243 dayswrongDSO = 300 / (450 x 4) x 365 = 61 daysor 300 / 450 x 91.25 days = 61 daysAnnualise the revenue, or use the days in the quarter.Never mix the two.Why it slipped throughThe formula is right; theperiods are not. 450 is threemonths of sales, 365 is twelvemonths of days.The ratio comes out exactlyfour times too large: 243 is61 x 4.Check: 243 days means acustomer pays eight monthslate. Ask if that is plausible.
    Dividing receivables of Rs 300 crore by one quarter's revenue of Rs 450 crore and multiplying by 365 days gives 243 days, exactly four times the right answer of about 61 days, which comes from annualising revenue or using the 91 days in the quarter.
    The relationship
    DSO=ReceivablesRevenue in period×days in period=300450×91.25=60.8\text{DSO} = \frac{\text{Receivables}}{\text{Revenue in period}} \times \text{days in period} = \frac{300}{450} \times 91.25 = 60.8
    Revenue in periodsales over the same span of time as the day count
    days in period365 for a year, about 91 for a quarter
    What it says in wordsMatch the revenue period to the day count, and DSO is the number of days of sales still unpaid.

    How would you have caught 243 days before it went out?

    Run a plausibility check before any number leaves your desk. 243 days says the average customer pays eight months after the sale, which almost no ordinary business tolerates, so the number should have triggered a second look on sight. A second check: compare with last quarter's DSO computed the same way. A sudden fourfold jump is almost always a formula or period error, not a collections crisis. Say the limitation of the corrected figure too: quarter-end receivables against average daily sales can swing with seasonality, so analysts often use average receivables over the period, and a strong last month of the quarter will push DSO up even when customers pay on time.

    Where candidates lose it

    The error itself is the trap: quarterly revenue with 365 days. It happens most when a template built for annual numbers is fed quarterly data. Spot the factor of four and say so.

    The second loss is fixing it silently. The interviewer wants you to name the rule, match the period of revenue to the days you multiply by, and to say how you would catch it next time.

    What the interviewer asks next

    • If the last month of the quarter carried half the quarter's sales, how would that distort DSO?
    • How would you compute days payable outstanding from quarterly data?
    • Why might an analyst prefer average receivables to the quarter-end figure?