Days Sales Outstanding (DSO) Explained
What is Days Sales Outstanding (DSO)?
How is DSO calculated?
Days Sales Outstanding (DSO) Explained
Days Sales Outstanding (DSO) is a measure of how many days, on average, it takes a company to collect payment on its accounts receivables. DSO is calculated by dividing the current balance of receivables by the annual credit sales and then multiplying by 365.
Days Sales Outstanding (DSO) is a key financial metric used by companies to evaluate their efficiency in collecting payments from their customers. It gives insight into how effective a company is at managing its accounts receivables.
To calculate DSO, you simply divide the current balance of receivables by the annual credit sales and then multiply the result by 365. The formula is:
DSO = (Current Balance of Receivables / Annual Credit Sales) x 365
For example, if a company has a current balance of receivables of $500,000 and annual credit sales of $2,000,000, its DSO would be calculated as follows:
DSO = ($500,000 / $2,000,000) x 365 = 91.8 days
A lower DSO indicates that the company is collecting payments more quickly, which is generally preferred as it shows good cash flow management. On the other hand, a higher DSO means that the company is taking longer to collect payments and may indicate potential cash flow problems.
Therefore, companies should aim to keep their DSO as low as possible to ensure a healthy cash flow and efficient operations.