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

Every business is different and, consequently, there is no set DSO amount that indicates good or bad accounts receivable management. The DSO shows that it takes approximately 58 days on average to collect money from credit sales for this company. If payment terms are 30 days, this company needs to change its accounts receivable department.

• Putting some effort into mitigating these lists can be a solution to the problem as well.
• It’s theoretically calculated for an internal comparison between the DSO and BPDSO.
• If DSO is low, then customers are paying their bills more quickly, which bodes well for cash flow.
• And you should be customizing those metrics according to the unique nuances of your business.
• An increasing trend might signal difficulties faced by clients in making timely payments or problems within your own collections process.

A high DSO number means that it’s taking longer than you expected to collect cash from customers. Working primarily with clients who have good credit histories and track records of paying on time can help keep your average collection period short. Monitoring DSO is crucial for the financial health of B2B SaaS startups. The more proactive you are in measuring days to collect, the easier it will be to spot cash flow problems early and address them before they start to impact your operational efficiency. If a company’s DSO is increasing, it’s a warning sign that something is wrong.

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For example, a DSO increasing over time might indicate poor customer satisfaction, resulting in their hesitation to pay. Additionally, salespeople may be extending payment terms to increase sales, which may or may not be a bad thing. Everything is highly dependent on the company itself, its past record of DSO, and its industry. Understand what days sales outstanding in accounting is, and its purpose in a business. Many businesses sell products to its customers on credit, giving them more time to pay for the product or service.

If a company’s period for recovering the payments of goods and services sold on credit is low, it suggests that the cash flow is frequent and the A/R Turnover ratio is up to the mark. 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. To begin with, analysts ought to only compare the DSO ratios between companies operating within the same industry vertical coupled with a similar revenue performance and business model.

A company that sells many holiday items may have a high DSO in the fourth quarter and low DSO in the first quarter. In that case, its DSO should be evaluated by comparing this year’s first quarter to last year’s first quarter. You count back every month until you find your gross sales are higher than your A/R. Your DSO is the amount of time you’ve added together by counting back.

Dales Sales Outstanding Explanation

Cash sales aren’t worked into the DSO calculation since you get paid for those upfront. DSO cannot compare companies with significant differences in the ratio of sales that are credit versus cash, since the calculation does not consider cash payments. 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. While if the case is otherwise and DSO is higher, signifying more days taken to collect cash for the credit sales indicates a hampered market reputation for the company/business. However, a high DSO for one could be a low DSO for the other sector and vice-versa. Thus, the average number of days that Company Xing takes to recover cash for its credit sales or debts is 73 days.

Many organizations struggle to manage their vast period costs of AWS accounts, but Control Tower can help. Therefore, as the current value of money is more, the sooner it is received, the better it is. The period used to measure DSO can be monthly, quarterly, or annually. When the customer pays the 1,000 USD in December, the open amount is set to 0 in open receivables.

Aside from those ones, calculating your average DSO can help you measure and track the effectiveness of your accounts receivables. DSO is a valuable indicator as it gives an indication of the efficiency of a company’s accounts receivable management as well as a tool to track changes in the quality of a company’s credit sales. Sales revenue earned but tied up in receivables cannot be used to fund operations, grow the business through investment, or be applied to retire costly debt.

Financial Ratios

A company’s AR balance is the dollar value of their accounts receivable. Become a Billtrust Partner Grow your business by introducing customers to accounts receivable automation and fintech innovation. When DSO is high or rising, managers should look into the financial health of their customers and try to understand why they are taking longer to pay.

As a result, management may need to take action to increase the efficiency of their accounts receivable department. With that, Kolleno is a smart credit control platform that may be the perfect solution for all businesses out there. In particular, the accounts receivable software by Kolleno is excellent at automating manual accounts receivable procedures, thereby aiding businesses in lowering their DSO values.

This days sales outstanding formula is more complex but more accurate too. That’s why most CFOs and finance professionals use this method to calculate their company’s DSO and that’s why you should use it too. Given the above data, the DSO totaled 16, meaning it takes an average of 16 days before receivables are collected. Generally, a DSO below 45 is considered low, but what qualifies as high or low also depends on the type of business.

What are the Other Metrics to Analyze Along with the DSO?

Your business is promptly getting the money it needs to create new business. Having a DSO greater than the standard payment terms indicates the company is not collecting money from its customers on time. Because of this, management will have less money available to spend on operating activities. In order to decrease the DSO, changes will need to be made to the accounts receivable department to increase efficiency. In general, offering rewards for early-paying clients has been a well-known tactic that companies adopt to accelerate their payment procedures because early-bird discounts and perks have always attracted customers. On the contrary, the firm could also consider setting hefty penalties for clients who have been constantly late with settling their outstanding debts.

An up-trending DSO could mean your company offers a lot of credit sales, potentially leading to cash flow challenges. At the same time, a down-trending chart could tell cash payments come in early – a good accounts receivable turnover. Days Sales Outstanding is the average number of days taken by a firm to collect payment from their customers after the completion of a sale. As a business owner, you can also view DSO as the number of days it takes for credit sales to be converted to cash, or the number of days that receivables remain outstanding until they’re collected. DSO indicates the average number of days a company takes to collect on its credit payments. It is a measure of how efficient the accounts receivable department is.

Applying the following methods can lower the DSO for small companies with a higher value than the generally accepted 45. A company with a large capitalization may not view a DSO of 60 as a severe issue. What qualifies as high or low depends on the business type and the industry. PO Numbers are a crucial detail required for Purchase Orders and Invoices, helping identify and manage your customers purchase journey. Take the opportunity to check in with your firm’s digital ecosystem and implement good habits.

How Important is Days Sales Outstanding in Business Operations?

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. If DSO is high, then customers are taking longer to pay, which can hurt a company’s cash flow. If DSO is low, then customers are paying their bills more quickly, which bodes well for cash flow. Not having to spend time calculating your days sales outstanding means dedicating your energy to tasks with a higher added value.

Your automated responses must be adaptable to suit these needs, otherwise, you’ll end up wasting even more resources trying to fix the problem. An automated system can streamline your payment process and enhance your account receivable process. You can automate payment reminders to help you send timely payment reminders automatically while an automated order-to-cash tool can make your account receivables process a lot better. To calculate DSO, the first step is to decide how long a time period you want to measure – could be monthly, quarterly, or annually.

On average, it takes Company A 18 days to collect payment from its customers. To calculate the DSO figures, the system takes into account open receivables and sales . When setting the P1 value, you need to consider that there could be values in open receivables that remain open for a long time before they are paid. When setting the P2 value, you need to consider whether sales take place sporadically or seasonally.

Negative impact on cash flow.When you have outstanding invoices, it means that there is money tied up in accounts receivable instead of being available as liquid assets. This can create challenges when trying to cover operational expenses or invest in growth opportunities. The differences between days sales outstanding and average collection period are nuanced and dependent on your industry.

The more granular you can get with the calculation, the more strategic insights you’ll get from the results. Therefore, Company A’s DSO equals 33.8 [($1.2 million ÷ $3.2 million) x 90 days]. Gain in-demand industry knowledge and hands-on practice that will help you stand out from the competition and become a world-class financial analyst.

This is largely because you’re not dealing with cash sales the way you would in consumer packaged goods or retail. Comparing your company’s DSO against internal and SaaS benchmarksprovides valuable insight into how well you are performing relative to expectations. You don’t want to over-index on competitor benchmarks, but it’s helpful to have the context as a baseline. Automation-assisted collections solutions help collectors do their work more efficiently, leading to faster payments.