Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is the number of days it takes to collect your receivables in a given amount of time. It is an important financial indicator as it shows both the age of a company’s accounts receivable and the average time it takes to turn those receivables into cash. DSO reveals how many days worth of sales are outstanding and unpaid within a specific period.
Having an above average DSO costs your company money. As a “Rule of Thumb,” your DSO delinquent balances should not exceed 33% to 50% of the selling terms. If terms are 30 days, then an acceptable DSO or the “Safe Collection Period” is 40 to 45 days. A DSO receivable at 15 days past terms is a collection candidate. Remember, the less money that is being tied up in accounts receivable the more money that can be used for company investment or dividends.
There are several ways to calculate DSO. The most common method is to take the Total Receivables divided by the Total Credit Sales multiplied by Days in Sales. The terminology is explained below.
Total Credit Sales- This number should only include credit sales. Cash sales should be excluded.
Total Receivables- The total receivables in the Days In Sales you are trying to calculate.
Days in Sales- Is a period in time as defined by the following:
Quarterly (3 months)- 91 days
Bi-Annually (6 months)- 182 days
Annually (1 year)- 365 days
Total Receivables = 5,000,000