Days Sales Outstanding
Days Sales Outstanding (DSO), also known as the average collection period, represents the average number of days it takes for a company to convert its sales into cash. In other words it measures the average time that company’s accounts receivable are outstanding.
Businesses can improve their cash flow, credit risk management, operational efficiency, and decision-making by monitoring and analyzing DSO. Having a better understanding of the impact of DSO can help companies strengthen their financial position and achieve sustainable growth.
How To Calculate DSO
To calculate DSO, divide the total accounts receivable during a certain time period by the total credit sales during the same period and multiply the result by the number of days in that period. Here is the formula:
DSO = (Total accounts receivable ÷ Total credit sales) x Number of days in the period
For example, if the total accounts receivable is $100,000 and the total credit sales (sales made on credit that have not been paid yet) over a 30-day period is $500,000, then the DSO would be 6 days.
DSO = ($100,000 ÷ $500,000) x 30 = 6
Why Is DSO Important?
DSO is an important metric for businesses of all sizes because it provides insights into how effectively a company is collecting payments from customers.
A high DSO indicates that a business is taking too long to collect payments, which can lead to cash flow issues that can impact growth, operations, and profitability.
On the other hand, a low DSO indicates that a company is collecting payments quickly, has improved cash flow and better financial stability.
Good vs Bad DSO
The average DSO varies depending on the industry, but generally, a DSO of 45 days or less is considered good, while a DSO of 60 days or more is considered bad, especially for small businesses.
Benefits of Tracking DSO
- Improved cash flow: By monitoring DSO, businesses can identify issues with their collections process and take actions to improve cash flow.
- Better financial planning: DSO can help businesses forecast future cash flow and plan for expenses, investments, and growth opportunities
- More accurate financial reporting: By tracking DSO, businesses can provide more accurate financial statements and reports.
- Enhanced customer relationships: By improving their collections process, businesses can build stronger relationships with customers, which can lead to increased loyalty.