Days Sales Outstanding DSO
Your DSO or Days Sales Outstanding gives you your average collection period, or how long on average it takes you to turn your receivables into cash. Your average collection period is the number of days, on average, it takes your customers to pay you. Your DSO may be a reflection of several things such as your credit policy, a liberal policy, providing relaxed credit standards will usually generate higher sales volume and a longer average collection period, general economic conditions as they affect the finances of your customers and their customers will affect your DSO as will the attractiveness of any discounts you offer for prompt payment and the diligence of your collection efforts.
In short, regular DSO measures the time it takes to collect your receivables, and provides an understanding of your company’s internal collection efficiencies. To calculate your DSO you need three pieces of information.
- The number of days in the sales period to be analyzed
- Total accounts receivable (How much money is owed to your company now)
- Total credit sales for the period analyzed
Notes:
Your receivable figure should include only credit sales, cash sales should be excluded. This figure should represent receivables resulting from sales of merchandise or service only. Amounts due from the sale of equipment, real estate etc should not be included.
“Days in sales period” is defined as follows:
- Annual = 365 days
- Six Months = 182 days
- Quarter = 91 days
To calculate your DSO use one of the following formulas or click here to go to our DSO calculator.
Accounts receivable
Annual credit sales/365 days
or
Total Receivables
Total credit sales(x)Number of Days
As a “Rule of Thumb”, your DSO should not exceed 1/3 to 1/2 of the selling terms. That is, if terms are 30 days, an acceptable DSO is 40 to 45 days.