Accounts Receivable Dictionary

What is Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) is a key metric in accounts receivable that measures how quickly a company collects payment from its customers.

DSO is calculated by dividing the total amount of outstanding customer invoices by the total amount of credit sales in a given period, and multiplying that number by the number of days in the period. The result is the average number of days that it takes a company to collect payment from its customers.

For example, if a company has $10,000 in outstanding customer invoices, and its total credit sales for the month were $100,000, its DSO would be calculated as follows:

DSO = ($10,000 / $100,000) * 30 days = 3 days

This means that, on average, it takes the company three days to collect payment from its customers. A lower DSO is generally considered better, as it indicates that a company is able to collect payment from its customers quickly.

Why Days Sales Outstanding is an important metric

DSO is an important metric for a business owner to monitor, as it can provide valuable insight into the health and efficiency of their accounts receivable process.

A high DSO can indicate that a company is having difficulty collecting payment from its customers, which can lead to cash flow problems and financial stress.

On the other hand, a low DSO can indicate that a company is effectively managing its accounts receivable and is able to collect payment from its customers quickly and efficiently.

In summary, DSO is a key metric in accounts receivable that measures how quickly a company collects payment from its customers.

By monitoring DSO, a business owner can gain valuable insight into the efficiency of their accounts receivable process, and take steps to improve it if necessary.