Question

With the following data, calculate DSO and Debtor Turnover Ratio. Explain the importance of each and make inferences.

Rs. In Crores
FY 2021-22 FY 2020-21
Sales 1,01,000 87,255
Receivables 36,347 33,331
60% of the sales are on credit basis

Answer 1

Days Sales Outstanding (DSO) for FY 2021-22 is 210 days, and Debtor Turnover Ratio is 1.74 times. The DSO suggests the company takes a long time to collect receivables, while the Debtor Turnover Ratio indicates the frequency of collections within the year.

Step-by-step explanation:

To calculate the Days Sales Outstanding (DSO) and Debtor Turnover Ratio, we will utilize the given financial data for the fiscal years 2021-22 and 2020-21. Since 60% of sales are on credit, we'll base our calculations on the credit sales.

Credit Sales for FY 2021-22: Rs. 1,01,000 Crores * 60% = Rs. 60,600 Crores

Credit Sales for FY 2020-21: Rs. 87,255 Crores * 60% = Rs. 52,353 Crores

Debtor Turnover Ratio is calculated by dividing the credit sales by the average accounts receivable. Average receivables are the sum of the opening and closing receivables divided by two.

Average Receivables = (Opening Receivables + Closing Receivables) / 2 = (Rs. 33,331 Crores + Rs. 36,347 Crores) / 2 = Rs. 34,839 Crores

Debtor Turnover Ratio for FY 2021-22 = Credit Sales / Average Receivables = Rs. 60,600 Crores / Rs. 34,839 Crores = 1.74 times

Days Sales Outstanding (DSO) is the average number of days that receivables remain outstanding before they are collected. It is calculated as the number of days in the period multiplied by the average accounts receivable, divided by the total credit sales.

DSO for FY 2021-22 = (365 days * Average Receivables) / Credit Sales = (365 * Rs. 34,839 Crores) / Rs. 60,600 Crores = 210 days

The Debtor Turnover Ratio provides insight into how efficiently a company manages its receivables and is indicative of the company's collection practices. A higher ratio suggests quicker collection of receivables. The DSO provides the average time in days that it takes for a company to collect its receivables, with a lower DSO implying faster collections. Based on the calculated DSO of 210 days, it may be inferred that the company takes a long time to convert its credit sales into cash. Companies aim for a lower DSO to improve cash flow.