Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is a financial metric that indicates the average number of days it takes a company to collect payment after a sale has been made. It helps assess how efficiently a company manages its accounts receivable. A lower DSO value suggests that a company is effective in collecting its receivables, while a higher DSO indicates potential Cash Flow issues.
Formula: DSO = (Accounts Receivable / Total Credit Sales) x Number of Days
Example: If a company has $50,000 in accounts receivable and has made $300,000 in total Credit sales over a year, the DSO would be calculated as follows:
- DSO = ($50,000 / $300,000) x 365
- DSO = 0.1667 x 365 ≈ 61 days
This means it takes the company, on average, 61 days to collect payment after a sale.
Case: A company with a DSO of 45 days may be performing well in collections, while another with a DSO of 90 days might need to evaluate its Credit policies and collection practices to improve Cash Flow.