Days Sales outstanding(DSO)

Days Sales outstanding (DSO)

A company’s Days Sales Outstanding (DSO) is a measure of how long it typically takes for it to convert credit sales into cash. A different way to figure out DSO is to divide the overall net credit sales by the total amount of trade receivables during a specific time frame. Finally, this amount is multiplied by a certain number of days for that time period.

Monthly, quarterly, or annual time frames are acceptable for measuring DSO. A low DSO indicates that the company takes a few days to collect its receivables. However, a high DSO indicates that it is taking longer to collect receivables. A high DSO could cause long-term cash flow problems. Why? One of the three main indicators used to determine how quickly a company converts its cash is the DSO.

The Formula For Days Sales Outstanding

Calculating the average average amount of time for a company’s accounts receivable to be reported in cash is done through this formula:

DSO = receivables/net credit sales X days.

Let’s imagine that Marcus is a small business owner, sells his products, and receives money from his customers within 30 days of each transaction. While most customers pay on time, some often fail to do so. Marcus wants to know how efficient his accounts receivable process is. His financial statements look like this:

$30,000 in unpaid invoices

$350,000 net credit sales DSO = (30,000/350,000) x 365 = about 31.28

Since Marcus was aiming for a 30-day collection period, his DSO of 31 days is beneficial to his business. John can continue to have confidence in the efficiency of his accounts receivable management.

Cash sales are generally excluded from this DSO calculation formula because it only considers credit sales.

You simply need to multiply the number of days in the period by the final accounts receivable. You can easily derive the accounts receivable by dividing by the total credit sales for that period (monthly, quarterly, or annually).

How Important Is Day Sales Outstanding To Business Operations?

A key metric for assessing the liquidity of a company’s working capital is the number of days of sales outstanding. It is in the business’s best interest to collect receivables as quickly as possible because cash is so important to the operation of a business. Managers, investors, and creditors can see how well the company is by determining the DSO. A low DSO score means a high cash flow and liquidity score. The DSO value is also crucial for financial modeling.

How To improve DSO

If you want to increase the value of your DSO, you’ll need to ensure that all your receivables are received in time. This can be achieved by implementing some strategies such as:

  • Strict payment terms.
  • Watching for credit sales.
  • Trying to collect cash in advance.
  • Maintaining a recurring payment option and others.

In many companies, the number of accounts receivable can be a useful gauge of the company’s efficiency and the quality of its cash flow. If the number rises too high, it can interfere with regular company activities and delay your unpaid invoices. In any case, your company is losing money due to late payments.

If you care about money flow in and out of your business, you will pay attention to Finance KPIs. We know it can be difficult to calculate your finance KPIs while struggling with other business activities. That’s why we have developed a system to help you out. We’ll ensure that we pay attention to the financial aspect of your business and ensure that everything is properly monitored and accounted for.