How to Analyze Trade Credit - Pt. 4
We now introduce another method of calculating the DSO: the so-called countback method, or backward calculation .
The DSO countback is a very reliable indicator for the precise calculation of the average number of days needed to transform credits into cash, and is obtained by scaling from the credit exposure of the reference month, first of all the turnover of the same month, then the turnovers of the preceding months, until the complete absorption of the credit of the reference month.
In other words, to calculate this indicator, you take the total credit for a certain month, and subtract from this amount the turnover of the current month, that of the previous month and that of the month before that, and so on backwards until the difference between the residual credit and sales remains positive.
Let's clarify everything with an example.
Example #3
If our reference month is June, the credits at 06/30 amount to 500 euros (we do not consider the credits of April and May because they do not come into play in the calculation!); from these I deduct the revenues, also of June, equal to 230 euros, so I remain with 270 euros of credits; these 270 represent the credits of the previous month (May). From this we can deduce that the DSO is certainly greater than 30 days.
From these 270 euros of residual credit I deduct the May turnover, equal to 190 euros and I am left with 80 euros of residual credits; this amount represents the credit of the previous month (April). From this I can deduce that the DSO is certainly greater than 30 + 30 = 60 days.
Since the April revenue is 200, an amount that is greater than the remaining credit of 80, I stop my backward calculation here, and calculate the days of April with the now well-known formula:
The calculation of average days carried out with this method will therefore be:
This method is a little more cumbersome than the ones seen previously, but it has the advantage of being more precise .
Let's go back to example no. 1 already examined in the previous contribution, and let's see the result of the calculations carried out with this additional method.
As can be seen from the table and the related graphic representation, the DSO calculated with the countback method returns exactly the real data, equal to 48 days (dotted line).
Even if we want to complicate things a bit, by forecasting more diluted earnings over the 90 days as in example no. 2 of the previous contribution, we can see how this method once again provides the most accurate estimate. 
It should be reiterated, however, that the calculations previously carried out with 60 or 90-day DSO are still more than acceptable in terms of the significance of the results, so that, in the absence of seasonality, it may be superfluous to delve into the greater complexity of the calculation of the countback method.
What matters, in fact, is not so much to obsessively pursue the accuracy of the result, but rather to identify a reliable and satisfactory calculation methodology, and to use it constantly in the various surveys, so as to grasp the trend of the DSO over time and promptly intercept any danger signals.
In the fifth part of the article we will see a practical application of the DSO analysis, so as to understand its informative value even better.