What is Days Sales Outstanding
DSO (days sales outstanding) is an accounts receivable metric that measures the average length of time it takes a business to receive an invoice payment from a customer. This metric is useful in determining a business’ average collection time, indicating how effective a company is in managing its accounts receivables.
A business’ DSO represents its cash flow. If the DSO is high, it is indicative of slow payment and often cash flow problems. However, if a company has a low DSO, it means that the company effectively collects out on all of its accounts receivables and may indicate that the company’s clients have good credit policies.
The calculation of DSO is actually quite simple. After the determined period (monthly, quarterly, annually, etc.), one must divide the accounts receivables by the total credit sales, then multiply that number by the number of days it takes for the AR to get paid.
If the resulting number lies below 45, it is considered a low-value DSO (meaning that the company is effective in collecting out on its AR’s in a timely manner). However, it is important to understand the nature of your business as well as your clients. For some companies, a DSO of 45 may be too high and for others too low.
Remember that only credit sales are factored into the DSO equation. Cash sales have a DSO value of zero.
The tracking of DSO is important for companies looking to discover a trend in sales and payment. These trends will indicate when the best time for company investment is and when it is best to save. It will also illuminate the overall trend of DSO, illuminating to the business owner whether they need to step-up their collecting or if their customers are doing well with timely payments.
Tracking DSO has become easy with the software of today. There are plenty of DSO-tracking programs on the market or, if you would rather do it yourself, spreadsheets can be very useful for the tracking of DSO.
Days sales outstanding is an incredibly important and relatively simple metric that all companies should use to analyze cash flow. Once one has an understanding of both the short and long-term trends in DSO, they can anticipate when cash will be tight and when there is enough for expansion.