Days Sales Outstanding

What Is Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) refers to the average time a company or business takes to convert its credit sales into cash or collect the outstanding payments from customers. It is expressed in the number of days the credit sales providers take to retrieve their accounts receivables.

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Days Sales Outstanding (wallstreetmojo.com)

Computing the DSO monthly, quarterly, or annually helps businesses understand how quickly they receive or collect cash for their credit sales. In addition, it enables businesses to keep the cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more balanced, thereby saving them from running short of funds in the long run.

Understanding Days Sales Outstanding

Days Sales Outstanding determines the average number of days businesses take to get paid for the goods and services they sell on credit. DSO is one of the key performance indicatorsKey Performance IndicatorsKey performance indicators (KPIs) help a company evaluate its overall business performance against the set goals over a period. These can differ depending on the types of firm or industry and the assessment criteria. Also, most firms employ these indicators to stay ahead of the competition.read more for any business as it helps them assess the cash flows over a period.

If the DSO calculated is low, businesses frequently receive cash for their credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more, which signifies their efficient cash conversion cycleCash Conversion CycleThe Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.read more. On the other hand, if the DSO is high, it implies the infrequent flow of cash for businesses, affecting their performance financially in the long run.

Now you can Master Financial Modeling with Wallstreetmojo’s premium courses at special prices

Best Financial Modeling Courses by Wallstreetmojo

Days Sales Outstanding (DSO) Explained in Video

Interpretation

The DSO concept runs on the Time Value of Money (TVM)Time Value Of Money (TVM)The Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more principle, advocating the importance of the business’s cash. Therefore, as the current value of money is more, the sooner it is received, the better it is.

However, assessing what DSO range is good or bad is crucial. A DSO high for one sector might be a low DSO for another. Thus, the good or bad value of DSO varies from one sector to another. For example, the average DSO for discount stores, like Dollar General, Burlington Stores, etc., is approximately 4 days. On the other hand, the same value is unexpectedly low for the oil and gas sector as its normal DSO ranges between 50 and 130 days.

Days Sales Outstanding Formula

The Days Sales Outstanding formula to calculate the average number of days companies take to collect their outstanding payments is:

DSO = (Accounts Receivables)/(Net Credit Sales/Revenue) * 365

Example With Calculation

Let us consider the following Days Sales Outstanding example to understand the concept better.

Company Xing had Gross Credit Sales of $500,000 in a year, Sales Returns of $50,000, and Accounts Receivables of $90,000. It calculated the DSO to check how balanced its cash conversion cycle is.

Here is how the Days Sales Outstanding calculation performs:

As the Gross Credit Sales and Sales Return are known, Company Xing computed its Net Credit Sales.

Net Credit Sales = Gross Credit Sales – Sales Return

                           =$500,000 –$50,000

                           =$450,000                                                                              

Now, the company used the Accounts ReceivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more information and Net Credit SalesNet Credit SalesNet credit sales is the revenue generated from goods or services sold on credit excluding the sales discount, sales allowance and sales return. It even amounts to the accounts receivables for a certain accounting period.read more figure as obtained to calculate the DSO.

Using the DSO formula:

DSO = (Accounts Receivables/Net Credit Sales/Revenue) * 365

         = (90,000/450,000) * 365

         = 73 days

Thus, the average number of days that Company Xing takes to recover cash for its credit sales or debts is 73 days.

Days Sales Outstanding vs Accounts Receivable Turnover

DSO and Accounts Receivable Turnover Accounts Receivable TurnoverAccounts Receivable turnover, also known as debtors turnover, estimates how many times a business collects the average accounts receivable per year and is used to evaluate the company's effectiveness in providing a credit facility to its customers and timely collection. Accounts Receivable Turnover Ratio Formula = (Net Credit Sales) / (Average Accounts Receivable)read more are two major key performance indicators for any business. While DSO is the term that defines the average number of days taken for firms or companies to get paid for their credit sales, A/R Turnover Ratio is the average number of times they receive the cash for their Accounts Receivables over a specific period.

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Days Sales Outstanding (wallstreetmojo.com)

When the DSO is low for a business, it implies its good performance, while having a low A/R Turnover ratio indicates infrequent cash flow, which is not a good thing for any business from any sector/industry.

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.

The formula to calculate A/R Turnover Ratio is:

A/R Turnover = (Net Credit Sales)/(Average Accounts Receivable)

Frequently Asked Questions (FAQs)

Recommended Articles

This article was the Days Sales Outstanding (DSO) meaning. Here we interpret Days Sales Outstanding Formula with example and complete calculation. You may also have a look at the below articles learn further –

• Days Payable Outstanding Formula
• Days Sales Uncollected Examples
• Compare – Issued vs. Outstanding Shares
• Ratio Analysis Formula