Days Sales Outstanding
Jul. 19, 2022
Days Sales Outstanding?
Days Sales Outstanding (DSO) is a metric used to measure the number of days it takes for a company to collect payments from its customers. A lower DSO means that a company is collecting payments more quickly, while a higher DSO indicates that it is taking longer for the company to collect payments.
DSOR = (Accounts Receivable / Sales) x Days
The lower your company’s DSO, the better. A low DSO indicates that your customers are paying their invoices quickly and that you are not extending too much credit. A high DSO, on the other hand, may indicate that your customers are taking too long to pay their invoices or that you are extending too much credit. Either way, it’s important to keep an eye on your DSO and work to reduce it if necessary.
There are a few ways to reduce your DSO:
-Offer discounts for early payment
-Send invoices as soon as goods or services are delivered
-Follow up on overdue invoices quickly
-Consider using a collections agency for delinquent accounts
By keeping a close eye on your DSO and taking steps to reduce it, you can ensure that your company is getting paid in a timely manner and improve your cash flow.
How to use Days Sales Outstanding?
DSO is calculated by dividing a company’s accounts receivable by its sales, and then multiplying that number by the number of days in the period. For example, if a company has $100,000 in Accounts Receivable and $200,000 in sales for the month of January, its DSO would be:
$100,000 / $200,000 = 0.5
0.5 x 31 (the number of days in January) = 15.5
This means that, on average, it takes the company 15.5 days to collect payment from its customers.
DSO is typically expressed as a number of days, but it can also be expressed as a percentage. To calculate DSO as a percentage, simply divide the DSO by the number of days in the period and multiply by 100. Using the same example above, the company’s DSO would be:
15.5 / 31 x 100 = 50%
This means that, on average, it takes the company 50% of the period to collect payment from its customers.
Why is Days Sales Outstanding important?
DSO is important because it can give you a good indication of how quickly your customers are paying their invoices. A high DSO means that it is taking longer for your customers to pay, which can have a negative impact on your cash flow. On the other hand, a low DSO indicates that your customers are paying their invoices quickly, which is good for your cash flow.
DSO can also be used to compare companies within the same industry. For example, if Company A has a DSO of 30 and Company B has a DSO of 60, it’s obvious that Company A is collecting payments more quickly than Company B. This information can be helpful when making decisions about which companies to do business with.\
What are the disadvantages of Days Sales Outstanding?
One disadvantage of DSO is that it only takes into account Accounts Receivable and sales. It doesn’t take into account other factors that could impact a company’s ability to collect payments, such as the creditworthiness of its customers or the payment terms of its invoices.
Another disadvantage of DSO is that it is not always an accurate reflection of reality. For example, if a company only sends out invoices at the end of the month, its DSO will be artificially high because it will take longer for the company to receive payment. This doesn’t necessarily mean that the company is having cash flow problems, but it’s important to keep this in mind when interpreting DSO.
What is a good Days Sales Outstanding?
There is no definitive answer to this question because it depends on many factors, such as the industry you are in and the payment terms of your invoices. However, a general rule of thumb is that a DSO of 30 days or less is considered good. This means that, on average, your customers are paying their invoices within 30 days.
What is a bad Days Sales Outstanding?
Again, there is no definitive answer to this question because it depends on many factors. However, a general rule of thumb is that a DSO of 60 days or more is considered bad. This means that, on average, your customers are taking more than 60 days to pay their invoices.