Days Sales Outstanding DSO Defined

That means it takes the business on average 51 days to collect on their invoices. Days sales outstanding is one of the best indicators of your business’ well-being. Keeping a close watch on your DSO and how it’s trending helps you and your AR team identify potential issues preventing the business from collecting on its receivables as efficiently as possible.

• Offering your customers a variety of payment options, like card payments and bank transfers will get you paid quicker, since your customers can opt for the most convenient payment option.
• This ratio measures the number of days it takes a company to convert its sales into cash.
• We also reference original research from other reputable publishers where appropriate.
• To gain a better insight, you should compare your company’s DSO against industry benchmarks, plus factor in economic fluctuations and your company’s capital structure and size.
• Generally, a figure of 25% more than the standard terms allowed may represent an opportunity for improvement.
• This is usually quantified by analyzing your customers’ payment history.
• If a client has been disputing an invoice, it’s likely overdue and it will weigh on your DSO month after month.

A high receivables turnover ratio often indicates a conservative credit policy and/or an aggressive collections department. It can also mean that your company does business with a number of high-quality customers that pay their invoices in a timely manner. These equations are the most common methods for calculating days sales outstanding used by businesses as a KPI today. However, whether these represent good days sales outstanding ratios is the subject of much debate. A criticism of these methods focuses on the fact the DSO ratio only gives an average and doesn’t distinguish between prompt and tardy payments. It also doesn’t accurately reflect fluctuations in payment behaviour, whereby one customer may pay promptly for one invoice and delay paying the next. An automated platform can streamline your credit and collections further.

Set customers up with autopay

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. Days Sales Outstanding 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.

If a business is highly seasonal, a variation is to compare the measurement to the same metric for the same month in the preceding year; this provides a more reasonable basis for comparison. DSO is an indicator of how many average days worth of sales are tied up in receivables. If a company can lower their days sales outstanding , they can increase the cash available to their business for investments, payroll and purchasing. The calculation of days sales outstanding involves dividing the accounts receivable balance by the revenue for the period, which is then multiplied by 365 days. Low DSO ➝ A low value implies the company can convert credit sales into cash relatively fast, and the duration that receivables remain outstanding on the balance sheet before collection is shorter.

Five Tips for Following Up on Accounts Receivable

The credit sales figure will most often have to be provided by the company. As the name https://www.bookstime.com/ suggests, CEI measures how effective the collections team and their procedures are.

• 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.
• The Days Sales Outstanding metric is a key measure of a company’s liquidity and overall health.
• However, DSO measures the average amount of time it takes to collect revenue on all outstanding invoices, while ART measures the average amount of time it takes to collect revenue on the average invoice.
• By scheduling automatic reminders, you’ll be able to keep the process under control.
• If the result is a low DSO, it means that the business takes a few days to collect its receivables.
• Manual, paper-based communications, such as writing and sending letters, are prone to human error and take days to arrive in the post.

That said, an increase in A/R represents an outflow of cash, whereas a decrease in A/R is a cash inflow since it means the company has been paid and thus has more liquidity . The product/service has been delivered to the customer, so all that remains is for the customer is to hold up their end of the bargain by actually paying the company. Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date. Working capital management is a strategy that requires monitoring a company’s current assets and liabilities to ensure its efficient operation. By quickly turning sales into cash, a company has a chance to put the cash to use again more quickly. Since the onset of the pandemic, C-suite leaders have leaned on their finance teams more than ever to inform their decision making. In 2020, 65% of CFOs reported engaging with their CEOs about company performance more often, according to a McKinsey survey.

Maintain positive relationships with customers

You can use Best Possible DSO only at the current receivables to calculate the best length of time you can turn over those receivables. You can calculate DSO using an average balance over the period rather than Ending Balance snapshot. As a Collections Manager you need to understand the days sales outstanding metrics and use the analytics to make decisions. This table displays the receivables data used for each of the calculations. GrowthForce accounting services provided through an alliance with SK CPA, PLLC. DSO needs to be calculated on a month-to-month (or period-to-period) basis to see if the trend is moving higher or lower.

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. 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. Days sales outstanding is the average number of days it takes a company to receive payment for a sale. Accounts Receivable Turnover is another important metric that tracks and measures the effectiveness of your AR collections efforts. The ART ratio quantifies how well you’re managing the credit you extend to customers and how quickly that short-term debt is paid.

With an invoicing software, you can track payment status, set automated payment reminders to be sent out, and customize your invoices according to individual customers. The additional advantage here is that the invoices have the payment terms and the payment policies of your firm stated on them. On the other hand, a higher DSO value indicates that your firm is allowing a longer duration to receive payments, and worse, your firm is making a lot of sales on credit.

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DSO Calculator – Excel Model Template

DSO looks at the relationship between a company’s average accounts receivable and its sales made on credit during a certain time period. Delaying the process of sending invoices to your customers will only delay the payments further. DSO is valuable as a shorthand indicator that helps a company understand how their accounts receivable collections process compares to others in their industry.