Days Sales Outstanding Calculator

Your Days Sales Outstanding (DSO)

How to use the Days Sales Outstanding Calculator

This calculator is based on the equation:

(Average Accounts Receivable / Net Revenue) x 365 

Input your business’s average accounts receivable amount for a 12-month period and the annual sales volume for the same period to calculate your Days Sales Outstanding (DSO).

Let’s put the days sales outstanding calculator to work using an example case. We’ll calculate DSO using a fictional company’s financial records for a period of January 1 to December 31.

Step 1: Enter the business’s Net Revenue for the 12-month period. 

In our example, sales = $1,500,000

Enter “1,500,000” in the calculator’s “Net Annual Revenue” data field.

Step 2: Enter the average accounts receivable value.

Here’s how to calculate the average accounts receivable for a period:

Starting Accounts Receivable + Closing Accounts Receivable / 2

Let’s say the average accounts receivable is ($270,000 + $230,000) / 2 = $250,000.

Enter “250,000” in the calculator’s “Average Accounts Receivable” data field.

Step 3: Results are displayed

The calculator processes the data using the formula:

($250,000 / $1,500,000) x 365 = 60.83 days

In this example, the company has a high result well above industry benchmarks.

The purpose of DSO: Why should we calculate DSO?

Let’s explore the purpose of calculating DSO.

1. Assessing Operational Effectiveness Through DSO

Working capital serves as a vital indicator for evaluating the efficiency of a company’s operations. A high Days Sales Outstanding (DSO) relative to industry peers suggests that the company takes an above-average time to collect payments from its customers. This could indicate issues in the company’s collections process, warranting immediate attention and potential corrective measures.

2. Using DSO to Spotlight Potential Bad Debts

When a company’s DSO is significantly higher than its competitors, it’s worth examining whether the accounts receivable should be categorized as bad debts. Bad debts are funds owed by customers that are unlikely to be recovered, and carrying high levels of bad debt can severely impact the company’s future financial performance.

3. The Negative Impact of High DSO on Small and Medium Enterprises (SMEs)

While accounts receivable and working capital might constitute a minor fraction of a public company’s balance sheet, they are often of pivotal importance for smaller firms. Small and medium enterprises (SMEs) frequently depend on their working capital to fund day-to-day operations. A high DSO can be particularly harmful for these businesses, potentially leading them toward bankruptcy.

It’s important to note that DSO offers just a singular perspective on a company’s operational efficiency. To gain a more comprehensive understanding, one should also consider other financial ratios, such as Days Payable Outstanding (DPO), Days Inventory Outstanding (DIO), and the Cash Conversion Cycle.

What’s a good Days Sales Outstanding (DSO) ratio?

The ideal DSO ratio depends on the industry, market conditions and other factors. However, a DSO of under 45 days is generally considered low. If a company’s DSO is higher or increasing, it’s often a sign something is going wrong.  

This could include declining customer satisfaction or too many customers with poor credit are making purchases. Since a high DSO can disrupt a company’s ability to meet its own financial obligations, businesses must act quickly to address the root causes of increasing DSO. 

How can a company improve its DSO?

Improving Days Sales Outstanding (DSO) means getting customers to pay their bills more quickly. Here are some ways a company can try to make that happen:

  1. Clear Billing Policies: Make sure customers know exactly when and how they need to pay. The easier it is for them to understand, the quicker they can pay you.
  2. Fast Invoicing: As soon as you deliver a product or service, send the invoice immediately. The quicker the invoice gets to the customer, the faster you can get paid.
  3. Early Payment Discounts: Offer a small discount if customers pay their bills before the due date. This makes them want to pay early!
  4. Payment Reminders: Send friendly reminders by email or phone when a payment is almost due. Sometimes people forget, and a reminder can help them remember to pay you.
  5. Online Payments: Make it easy for customers to pay online through credit cards or digital payments. The easier you make it, the faster you get your money.
  6. Review Credit Policies: If you have customers who take a long time to pay, you might want to think about whether you should keep giving them products or services on credit. Maybe ask them to pay at least a part of it upfront.
  7. Track DSO: Keep an eye on how long it’s taking to get paid. If you notice that it’s taking longer and longer, you can look into why that’s happening and try to fix it.
  8. Talk to Late Payers: Sometimes the best way to get paid is to talk to the customer and find out why they’re late. Maybe they have a problem you can help solve, making it easier for them to pay you.
  9. Invoice Factoring: Many companies utilize invoice factoring to dramatically improve DSO. Using this business financing solution, businesses sell invoice receivables at a discount to receive payment within 24 hours.  

Frequently Asked Questions (FAQs) about Days Sales Outstanding

What is DSO?

DSO is a financial metric that measures the average number of days it takes for a company to collect payment from its customers after a sale has been made.

How is DSO calculated?

DSO is calculated by dividing the average accounts receivable balance for a period by the total sales in the same period multiplied by the number of days in the period.

The formula is: DSO = (Average Accounts Receivable / Net Revenue) x Number of Days.

Why is DSO important for businesses?

DSO provides insights into a company’s efficiency in collecting payments, cash flow management, and potential liquidity issues. It helps assess the effectiveness of credit and collection policies.

What is considered a good DSO ratio?

A lower DSO ratio is generally desirable, as it indicates faster collection of receivables. However, what is considered “good” can vary depending on the industry, business model, and specific circumstances.

What factors can affect DSO?

Several factors can impact DSO, including payment terms, customer creditworthiness, industry norms, economic conditions, collection policies, billing accuracy, and the efficiency of the accounts receivable process.

How can a high DSO impact a company’s cash flow?

A high DSO means that a company’s cash is tied up in accounts receivable, potentially causing cash flow problems. It may hinder the company’s ability to pay suppliers, meet financial obligations, or invest in growth opportunities.

Is a lower DSO always better for a company?

While a lower DSO generally indicates better cash flow and collection efficiency, excessively low DSO could indicate overly aggressive collection practices or overly restrictive credit policies, which may affect customer relationships and sales.

How does industry or business type affect DSO benchmarks?

DSO benchmarks can vary by industry and business type due to differences in payment terms, sales cycles, customer behavior, and business models. It’s important to compare DSO against industry peers to assess performance effectively.

What are the differences between DSO and average collection period?

DSO and average collection period are often used interchangeably. However, DSO is typically measured in days, while the average collection period is measured in the number of times the average accounts receivable turns over during a year.

Explain Days Sales Outstanding (DSO) like I’m 5 years old (ELI5)

Imagine you have a lemonade stand. You sell lemonade to people, and sometimes they say, “I don’t have money right now, but I’ll pay you later!” You say, “Okay!” and give them lemonade.

Days Sales Outstanding is like counting the number of days it takes for those people to come back and give you the money they owe you for the lemonade.

If it takes a long time for people to pay you back, then you might not have enough money to buy more lemons and sugar to make new lemonade. But if people pay you back quickly, then you can keep your lemonade stand running smoothly!

So, Days Sales Outstanding helps you understand how quickly you’re getting your money back after you sell something.

ABOUT eCapital

Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.

We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.

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