Days Sales Outstanding DSO Definition, Formula, Importance

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days sales outstanding equation

If you have a high DSO, you want to look at your whole receivable process and see where and how you can improve it. Of course, you can also use DSO calculation formulas to monitor your financial health over the years… For instance to see how a change in your pricing or profitability margin affects it. You count back every month until you find your gross sales are higher than your A/R. If you want to calculate your DSO over a year, using the simple method will not take into account any seasonality in your business.

days sales outstanding equation

Like DSO, AR turnover reflects a company’s ability to collect money owed to it by customers, though in this case a high ratio is the end goal. Working together, a high receivables turnover and a low DSO means all receivables are returned on time. A low receivables turnover and high DSO means something isn’t working properly and the collections process needs attention.

What is the difference between DPO and DSO?

Divide the total number of accounts receivable during a given period by the total dollar value of credit sales during the same period, then multiply the result by the number of days in the period being measured. NetSuite’s Accounts Receivables Software automates manual AR processes, which can help companies lower their DSO. The software quickly generates and sends more accurate invoices, defines credit terms and manages collections. It also automatically sends reminders to customers as their payment due dates near, as well as providing finance teams with visibility down to the individual customer and invoice. These robust capabilities can help companies improve their liquidity, fund growth, shorten the credit-to-cash cycle and seize new investment opportunities as they arise.

Your customers are the lifeline of your business, and to grow, you need to retain them. However, it’s crucial to understand whom you’re getting into business with; if a customer consistently delays payments, you must re-evaluate your strategy. Ensure your collections team is evaluating your customers’ creditworthiness. The high-level formula for calculating days sales outstanding is important — but the results can only tell you so much. While this metric seems simple on the surface, you’ll want to customize the calculation to get more granular views for your business.

Days Sales Outstanding FAQs

By quickly turning sales into cash, a company has a chance to put the cash to use again more quickly. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. January has 31 days, so 31 will be the number of days we use in the DSO formula.

Your DSO ratio tells you how efficiently you’re collecting cash from customers, so the more granular you can get with your calculations, the easier it will be to identify opportunities for improvement. Days sales outstanding (DSO) is an accounting metric that measures the average number of days it takes a business to receive payment for goods and services purchased on credit. The company is not doing a good job collecting money on time from its customer. The average amount of time it takes to collect money is about 37 days over the payment terms. As a result, management may need to take action to increase the efficiency of their accounts receivable department. Accounts receivable refers to the outstanding balance of accounts receivable at a point in time here whereas average sales per day is the mean sales computed over some period of time.

How to Interpret DSO Ratio?

It’s a variable of the DSO calculation, which tells you how many days, on average, it takes your customers to pay the AR balance. And you should be customizing those metrics according to the unique nuances of your business. To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period, and then multiply the result by the number of days in the period being measured. If you sell to customers on credit, knowing your days sales outstanding is important since the collection rate directly impacts cash flow and overall company profitability. Knowing your DSO can also help you take proactive measures to prevent or correct potential issues.

days sales outstanding equation

Leading collection modules gather data from multiple, including external, sources. A company can configure strategies that enable collectors to implement customer-specific approaches. Similarly, collections are slower where the collections department is disorganized or lacking timely, accurate information. On the other hand, a well-organized, disciplined and informed collections department will see more on-time payments and contribute to a lower DSO. As you can see from this example, the DSO formula is a relatively simple metric to calculate given sufficient data such as the total accounts receivable during a period. Let’s take an example to show how the days sales outstanding formula works.

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