# Days Sales Outstanding (DSO): Meaning in Finance, Calculation, and Applications (2023)

## What Is Days Sales Outstanding (DSO)?

Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment for a sale. DSO is often determined on a monthly, quarterly, or annual basis.

To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period, and then multiply the result by the number of days in the period being measured.

Days sales outstanding is an element of the cash conversion cycle and may also be referred to as days receivables or average collection period.

### Key Takeaways

• Days sales outstanding (DSO) is the average number of days it takes a company to receive payment for a sale.
• A high DSO number suggests that a company is experiencing delays in receiving payments, which can result in a cash flow problem.
• A low DSO indicates that the company is getting its payments quickly. That money can be put back into the business to good effect.
• Generally speaking, a DSO under 45 days is considered low.

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(Video) Days Sales Outstanding (DSO): Meaning in Finance, Calculation, and Applications

## Understanding Days Sales Outstanding (DSO)

Given the vital importance of cash flow in running a business, it is in a company's best interest to collect its outstanding accounts receivables as quickly as possible. Companies can expect, with relative certainty, that they will be paid their outstanding receivables. But because of the time value of money principle, time spent waiting to be paid is money lost.

That said, the definition of "quickly" depends on the business. In the financial industry, relatively long payment terms are common. In the agriculture and fuel industries, fast payment can be crucial. In general, small businesses rely more heavily on steady cash flow than large, diversified companies.

\begin{aligned}&\text{DSO} = \frac {\text{Accounts Receivable} }{ \text{Total Credit Sales} } \times \text{Number of Days}\\\end{aligned}DSO=TotalCreditSalesAccountsReceivable×NumberofDays

By quickly turning sales into cash, a company has a chance to put the cash to use again more quickly.

## What the Numbers Tell You

A high DSO number shows that a company is selling its product to customers on credit and waiting a long time to collect the money. This can lead to cash flow problems. A low DSO value means that it takes a company fewer days to collect its accounts receivable. That company is promptly getting the money it needs to create new business.

In effect, determining the average length of time that a company’s outstanding balances are carried in receivables can reveal a great deal about the nature of the company’s cash flow.

(Video) Days sales outstanding (DSO) - What is DSO & How is it calculated

It is important to remember that the formula for calculating DSO only accounts for credit sales. While cash sales may be considered to have a DSO of 0, they are not factored into DSO calculations. If they were factored into the calculation, they would decrease the DSO, and companies with a high proportion of cash sales would have lower DSOs than those with a high proportion of credit sales.

## Applications of Days Sales Outstanding

Days sales outstanding can be analyzed in a wide variety of ways. It suggests how efficient the company's collections department is, and the degree to which the company is maintaining customer satisfaction. It also helps identify customers who are not creditworthy.

Looking at a DSO value for a company for a single period can provide a good benchmark for quickly assessing a company’s cash flow. However, trends in DSO over time are much more useful. They can act as an early warning sign of trouble.

## Good and Bad DSO Numbers

If a company’s DSO is increasing, it's a warning sign that something is wrong. Customer satisfaction might be declining, or the salespeople may be offering longer terms of payment to drive increased sales. Perhaps the company may be allowing customers with poor credit to make purchases on credit.

A sharp increase in DSO can cause a company serious cash flow problems. If a company's ability to make its own payments in a timely fashion is disrupted, it may be forced to make drastic changes.

### 37.30

Average DSO for companies across various industries in the third quarter of 2022.

Generally, when looking at a given company’s cash flow, it is helpful to track that company’s DSO over time to determine if its DSO is trending up or down or if there are patterns in the company’s cash flow history.

(Video) Days Sales Outstanding | DSO | FIN-ED

DSO may vary consistently on a monthly basis, particularly if the company's product is seasonal. If a company has a volatile DSO, this may be cause for concern, but if its DSO regularly dips during a particular season each year, it could be no reason to worry.

## Limitations of Days Sales Outstanding

As a metric attempting to gauge the efficiency of a business, days sales outstanding comes with a limitation that is important for any investor to consider.

When using DSO to compare the cash flows of a number of companies, you should compare companies within the same industry, with similar business models and revenue numbers. If you try to compare companies in different industries and of different sizes, the results you'll get will be misleading because they often have very different DSO benchmarks and targets.

### When DSO Is Not As Relevant

DSO is not particularly useful in comparing companies with significant differences in the proportion of sales that are made on credit. The DSO of a company with a low proportion of credit sales does not indicate much about that company’s cash flow. Comparing such companies with those that have a high proportion of credit sales also says little.

In addition, DSO is not a perfect indicator of a company’s accounts receivable efficiency. Fluctuating sales volumes can affect DSO, with any increase in sales lowering the DSO value.

Delinquent Days Sales Outstanding (DDSO) is a good alternative for credit collection assessment or for use alongside DSO. Like any metric measuring a company’s performance, DSO should not be considered alone, but rather should be used with other metrics.

## How Do You Calculate DSO?

Divide the total number of accounts receivable during a given period by the total dollar value of credit sales during the same period, then multiply the result by the number of days in the period being measured.

## What Is a Good DSO Ratio?

A good or bad DSO ratio may vary according to the type of business and industry that the company operates in. That said, a number under 45 is considered to be good for most businesses. It suggests that the company's cash is flowing in at a reasonably efficient rate, ready to be used to generate new business.

(Video) All you need to know about DSO (Days Sales Outstanding)

## How Do You Calculate DSO for 3 Months?

During the last three months of the year, Company A made a total of $1,500,000 in credit sales and had$1,050,000 in accounts receivable. The time period covers 92 days. Company A’s DSO for that period is calculated as follows:

• 1,050,000 divided by 1,500,000 equals 0.7.
• 0.7 multiplied by 92 equals 64.4.

The DSO for this business in this period is 64.4.

## Why Is DSO Important?

A high DSO number can indicate that the cash flow of the business is not ideal. It varies by business, but a number below 45 is considered good. It's best to track the number over time. If the number is climbing, there may be something wrong in the collections department, or the company may be selling to customers with less than optimal credit. In any case, the company's cash flow is at risk.

The debt collections experts at Atradius suggest that tracking DSO over time also creates an incentive for the payments department to stay on top of unpaid invoices. Needless to say, a small business can use its days sales outstanding number to identify and flag customers that are weighing it down by not paying promptly.

(Video) Days sales outstanding (DSO) -Meaning, Measurement and interpretation

## The Bottom Line

In many businesses, the days sales outstanding number can be a valuable indicator of the efficiency of the business and the quality of its cash flow. If the number gets too high, it could even disrupt the normal operations of the business, causing its own outstanding payments to be delayed. In any case, cash delayed is cash lost to your business.

## FAQs

### What is DSO and how is it calculated? ›

Days Sales Outstanding (DSO) represents the average number of days it takes credit sales to be converted into cash or how long it takes a company to collect its account receivables. DSO can be calculated by dividing the total accounts receivable during a certain time frame by the total net credit sales.

What is the meaning of days sales outstanding? ›

Days Sales Outstanding (DSO) is the average number of days taken by a firm to collect payment from their customers after the completion of a sale.

How do you calculate DSO Days Sales Outstanding? ›

How is DSO calculated? Days Sales Outstanding = (Accounts Receivable/Net Credit Sales)x Number of days.

What is an example of DSO calculation? ›

During the last three months of the year, Company A made a total of $1,500,000 in credit sales and had$1,050,000 in accounts receivable. The time period covers 92 days. Company A's DSO for that period is calculated as follows: 1,050,000 divided by 1,500,000 equals 0.7.

Is a high or low DSO good? ›

Since days sales outstanding (DSO) is the number of days it takes to collect due cash payments from customers that paid on credit, a lower DSO is preferred to a higher DSO.

How do you calculate number of days sales? ›

What is the formula for Days Sales of Inventory? The formula for Days Sales of Inventory is: Days Sales of Inventory = (Average Inventory ÷ COGS), multiplied by 365.

How to calculate DSO in 3 months? ›

The DSO is calculated as follows: total open receivables last 3 months / 3) x 30 divided by total monthly sales last 3 months /3.

What are the main elements of DSO? ›

A digital storage oscilloscope typically has five main components:
• Display.
• Vertical input channel.
• Horizontal input channel.
• Trigger.
• Analog-to-digital converter.

An effective way for businesses to use the DSO calculation is to keep it tracked month by month on a trend line -- or a series of plotted data points indicating a certain pattern or direction. Using the DSO in this way can help companies see any changes in their business's ability to collect payments from customers.

How can I improve my DSO performance? ›

Need Cash Sooner? 5 Ways to Reduce Your Days Sales Outstanding (DSO) and Have A Reliable Cash Flow
1. At the core of high-performing companies is a tightened focus on financial health. ...
2. Set realistic expectations. ...
3. Deal with unpaid invoices. ...
4. Streamline invoice management. ...
5. Perform credit evaluations. ...
6. Define payment terms.
Dec 23, 2021

### What is a good DSO target? ›

How to Calculate DSO. Your firm should aim to have as low a DSO value as possible because it indicates that you're doing an excellent job of collecting outstanding debts. A DSO value between the lower 50s and upper 80s is typical for most architecture, engineering, or environmental consulting (AEC) firms.

What are the formulas for sales? ›

The formula to calculate gross sales is Total Units Sold x Original Sale Price = Gross Sales. A company's gross sales are the total sales of all its products and/or services over a period of time. Known as top-line sales, the number represents the total revenue of a business without deductions, returns, or allowances.

How do you calculate days? ›

1. Take the last two digits of the year.
2. Add to that one–quarter of those two digits (discard any remainder).
3. Add to that the day of the month and the Month Key number for that month: January = 1. June = 5. ...
4. Divide the sum by 7. The remainder is the day of the week!

What causes increase in DSO? ›

If revenue increases, receivables rises. Current balances, some on extended payment terms, impact the DSO calculation. Can your collectors collect current balances? If revenue goes down, current AR decreases and so does the DSO.

What are the benefits of a DSO? ›

6 Benefits of Joining a DSO
• Recruiting and Talent Management. ...
• Compliance and Legal Support. ...
• Insurance Management. ...
• Professional Networking and Training.

How does DSO measure time? ›

The period is found by determining the mid-point between the maximum and minimum waveform values, and measuring the time from the first mid-point in the waveform data to the third mid-point. All digital oscilloscopes have a horizontal resolution limit. The limit is determined by the maximum record length available.

What is the benefit of low DSO? ›

A low DSO is good news for your business! It means your customers respect your payment terms, which in turn is a good indicator of their satisfaction with the service/product you provide. In return, you'll be able to make the most of your cash flow and pay your suppliers on time.

How to calculate DSO for 6 months? ›

This calculation is used in the Days Sales Outstanding KPI, in the drill-down by period. The DSO is calculated as follows: total open receivables last P1 months / P1) x 30 divided by total monthly sales last P2 months / P2.

Is DSO based on invoice date or due date? ›

DSO or Days Sales Outstanding is a KPI that reflects the time frame it takes for your invoices to be paid by customers. It's counted in the number of days between the invoice being issued and the cash sales arriving in your company's bank account.

What is a good DSO in healthcare? ›

Typically, businesses will have a DSO of 30 from the traditional billing notion of n/30, which means collections on invoices that occur on average in 30 days. Generally, health care businesses have an average of 45-60 days sales outstanding if they work with a payer to collect patient revenue.

### What is Ddso formula? ›

Because accounts receivable = current + delinquent accounts receivable, the DDSO formula is often defined as (accounts receivable) (average sales per day) − (current accounts receivable) (average sales per day).

How do you calculate days sales? ›

The days sales inventory is calculated by dividing the ending inventory by the cost of goods sold for the period and multiplying it by 365.

How can I improve my DSO days? ›

There are several strategies to reduce DSO and improve an organization's cash flow, such as:
1. Make it easier for your customer to do business with you. ...
2. Stricter credit approval. ...
3. Invoicing. ...
4. Receivables management strategy. ...
5. Collections. ...
6. Incentives. ...
7. Customer purge.
Jan 3, 2023

What is the formula for calculating the sales per day? ›

Divide your sales generated during the accounting period by the number of days in the period to calculate your average daily sales. In the example, divide your annual sales of $40,000 by 365 to get$109.59 in average daily sales.

How is DSO calculated monthly? ›

You can calculate DSO by taking your Current Accounts Receivables Balance, dividing it by your Credit Sales Revenue During Measured Period, then multiplying that number by the Number of Days in Measured Period.

What happens when a firm has low DSO? ›

A low DSO value may also indicate that customers are paying on time or even early to benefit from discounts or the company has a very strict credit policy in place.

What affects the DSO number? ›

If revenue increases, receivables rises. Current balances, some on extended payment terms, impact the DSO calculation. Can your collectors collect current balances? If revenue goes down, current AR decreases and so does the DSO.

How is DBT calculated? ›

The formula for calculating a DBT figure is: DBT = [sum (payment amounts x days in arrears)] / [sum (payment amounts)]. Payment amounts must be cleared. Days in arrears can be within terms (early) or beyond terms (late). If a payment is within terms, days in arrears is a negative number.

What does Ddso mean in accounting? ›

Therefore, delinquent days sales outstanding (DDSO) and days beyond term (DBT) are more accurate metrics for determining your AR efficiency. DDSO calculates the average difference between the invoice due date and the date paid.

What does Ddso mean? ›

It operates 13 Developmental Disabilities Services Offices (DDSO) which operate group homes for the individuals with intellectual and developmental disabilities in its care.

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