Question

What will happen as a result of decreasing the firm’s days’ sales outstanding?

Select one:

a. The firm’s financial health worsens.

b. The firm’s accounts receivable increases.

c. The firm frees up cash.

d. The firm’s sales increase.

Answer 1

Days sales outstanding (DSO) = [accounts receivable/total credit sales] * 365

DSO is the number of days it takes an organization to collect cash from its credit sales. The lower the DSO figure the higher will be the liquidity situation of the organization and the higher will be the efficiency of its collections department.

As DSO declines cash comes in quickly and so the amount tied to accounts receivables are freed up and converted into cash. This freed up cash can be used for different purposes by the organization.

Thus the answer is option “c” – the firm frees up cash.