Calculating Days Sales Outstanding for SaaS Companies (Software Companies)

 While helping our expansion stage portfolio companies provide high quality financial reporting data we came across the dilemma of the DSO (days sales outstanding) calculation. This performance index measures the average time it takes for a company to collect its receivables. However, some of the portfolio companies’ management teams were calculating this number using their Bookings for the reported period, and others were using their Revenues for that same period.
According to SOP 97-2 the appropriate calculation of DSO for companies in the software industry depends largely on the sale contract.

• GAAP records Revenues when” Product or service has been delivered to the customer, collection is reasonably assured, no other commitments. Subscription services are typically recognized pro-rata over the term of the agreement, after any contingencies have been removed.”
• Also, Accounts Receivable are “Amounts owed by customers and for which collection is reasonably assured.” 
•  Bookings are “Contract value of orders, with specific definition depending upon company policy.”

Therefore, the answer to the DSO calculation lies between the lines of the contractual agreement between the Software service provider and the Customer. If under the purchase agreement, the customer has no rights of return, refund, or cancelation of the software service, the DSO can be calculated by dividing the A/R by the Billings for the given period and multiplying the result by the number of days in that given period. If the contract does not specify “no return, refund or cancelation clause,” the appropriate denominator in the DSO function should be the Revenues accrued in the given period.