Days Sales Outstanding

Definition

Days Sales Outstanding (DSO) is a financial metric used to measure the average number of days it takes a company to collect payment after a sale has been made. It is calculated by dividing the total amount of accounts receivable by the total amount of credit sales for a given period, and then multiplying that number by the number of days in the period.

Example

For example, if a company has $100,000 in accounts receivable and $500,000 in credit sales for a period of 30 days, the DSO would be calculated as follows:

$100,000 / $500,000 = 0.2

0.2 x 30 days = 6 days

Therefore, the company's DSO is 6 days.

Why it Matters

DSO is an important metric for companies to track because it provides insight into the effectiveness of their accounts receivable process. A high DSO indicates that the company is taking longer than average to collect payments, which can lead to cash flow problems. On the other hand, a low DSO indicates that the company is collecting payments quickly, which can lead to improved cash flow.

In addition, DSO can be used to compare a company's performance to that of its competitors. By comparing DSOs, companies can identify areas where they can improve their accounts receivable process and become more competitive.

Overall, DSO is an important metric for companies to track in order to ensure that they are collecting payments in a timely manner and to identify areas where they can improve their accounts receivable process.