days sales outstanding equation

With the right tool, you can optimize the credit and collections process, thereby improving the DSO. A crucial metric to gauge how a business manages and collects its assets. We recommend aiming for a high A/R turnover ratio as it indicates process efficiency. While DSO calculations help optimize A/R, they still leave room for assumptions. Besides, these factors help the senior management detect error-prone areas and formulate an action plan to eliminate them.

days sales outstanding equation

Simply put, DSO is a key performance indicator (KPI) used to study the company’s accounts receivables. In essence, tracking the DSO would be extremely advantageous to the business once they have comprehended the procedure behind its calculation. George Michael International Limited reported a sales revenue for November 2016 amounting to $2.5 million, out of which $1.5 million are credit sales, and the remaining $1 million is cash sales. NetSuite’s Accounts Receivables Software automates manual AR processes, which can help companies lower their DSO.

How to calculate Days Sales Outstanding with the DSO formula

DSO can shed light on the effectiveness of the accounts receivable and collection processes or spotlight issues on the customer side of the equation. By monitoring DSO, the company can put strategies in place to bring it down, such as by offering an early payment discount. Days sales outstanding is closely related to accounts receivable turnover, as DSO can also be expressed as the number of days in a period divided by the accounts receivable turnover. The lower the DSO, the shorter the time it takes for a company to collect. Whereas a higher DSO means a longer time period to collect and usually indicates a problem with a company’s collection process and/or credit underwriting.

Using this formula, the company will find that, on average, it takes them a little under 18 days to collect payments after a sale has been made. Your accounts receivable (A/R) is all outstanding payments owed to your company, and can be found by reviewing your balance sheet and income statement. Accounts receivables are a cornerstone of your business as they directly impact cash flow. Given the vital importance of cash flow in a business, it is in your best interest to collect your business’s outstanding account receivables as quickly as possible. The time value of money principle means that time spent waiting on invoices to be paid is effectively money lost. Giving your customers more ways to pay means you have more ways to collect payment.

What does a low DSO mean?

If the result is a low DSO, it means that the business takes a few days to collect its receivables. On the other hand, a high DSO means it takes more days to collect receivables. DSO is one of the three primary metrics used to calculate a company’s cash conversion cycle. The days sales outstanding (DSO) is the average time it takes a company to collect money from its customers. Days sales outstanding is equal to accounts receivable divided by net credit sales, then multiplied by 365. This figure gives management insight on how efficient the company’s accounts receivable department is and how much cash the company can spend.

And you should be customizing those metrics according to the unique nuances of your business. It means your company is able to collect payments from customers quickly after making sales. This can lead to improved cash flow and financial stability, allowing the business to reinvest in growth initiatives or cover operational expenses with ease. It can also indicate a strong handoff from sales teams to customer success as well as strong alignment between you and your customers on pricing and payment processes. 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.

Days Sales Outstanding

The software quickly generates and sends more accurate invoices, defines credit terms and manages collections. It also automatically sends reminders to customers as their payment due dates near, as well as providing finance teams with visibility down to the individual customer and invoice. These robust capabilities can help companies improve their liquidity, fund growth, shorten the credit-to-cash cycle and seize new investment opportunities as they arise.