What is Daily Sales Outstanding (DSO)?
Daily Sales Outstanding (DSO) or daily sales outstanding formula 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. It is also referred to as Days Sales Outstanding or simply as Receivables Days.
DSO is commonly used to assess the effectiveness of a company’s credit and collection policies and to evaluate the efficiency of its accounts receivable management. It provides insights into how quickly a company is able to convert its sales into cash.
To calculate DSO, you can use the following formula:
DSO = (Accounts Receivable / Total Credit Sales) * Number of Days
- Accounts Receivable: The total amount of money owed to the company by its customers.
- Total Credit Sales: The total value of sales made on credit during a specific period.
- Number of Days: The time period over which the DSO is being calculated (e.g., a month, a quarter, or a year).
For example, if a company has $100,000 in accounts receivable, $500,000 in total credit sales, and you are calculating DSO for a month (30 days), the calculation would be as follows:
DSO = ($100,000 / $500,000) * 30 = 6 days
This means that, on average, it takes the company approximately 6 days to collect payment from its customers after making a sale.
DSO is often compared to the company’s credit terms and industry benchmarks to assess its collection efficiency. A lower DSO indicates faster collections and better cash flow management, while a higher DSO suggests slower collections and potential cash flow issues.
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