Days Sales Outstanding (DSO) - Definition, Calculation, and Importance

Days Sales Outstanding is an important metric used in Accounts Receivable Management that indicates the average period of time a company takes to collect the amount it owes from the credit sales in order to make strategic decisions for improving the company’s liquidity, improving sales efficiency, and mitigating the risk of bad debts.

DSO calculation provides a glimpse of the company’s collection efforts and overall credit policy effectiveness. DSO ratio varies from industry to industry and company size. It is typically tracked on a trend line on a month-wise basis. In the case of seasonal fluctuations, they are compared with the seasonal fluctuations in the preceding year in the same duration. When a large corporation plans the acquisition of a small company, it uses the Days Sales Outstanding formula before pumping in more working capital to reduce the acquisition cost.

Days Sales Outstanding Formula for DSO Calculation

Now that we’ve already discussed what is DSO, let us discuss the formula for DSO calculation.

Akash, a small computer seller sells computers and laptops to his customers on the condition that they should make the full payment within 30 days. While a majority of his customers make timely payments, some sections of the customers delay it. Now, Akash wants to perform DSO calculation using the DSO formula to find out the efficiency of his Accounts Receivable process.

Here’s the Days Sales Outstanding formula:

Days Sales Outstanding = (Accounts Receivable / Net Credit Sales) x Period (Number of Days)

Our Days Sales Outstanding formula requires entering the following figures:

• Accounts Receivable: This is the amount that the business is yet to receive for the goods & services sold to its customers
• Net Credit Sales: This amount indicates the total amount of sales the company has made on credit, minus sales returned and allowances
• Period (Number of Days): Describes the period of net credit sales (indicated in the number of days).

Days Sales Outstanding (DSO) = (60,000 / 360,000) x 365 = 60 Days

This indicates that Akash’s Accounts Receivable process is inefficient. Even though the targeted credit period is only 30 days, the actual Days Sales Outstanding (DSO) is as high as 60 days. Akash must implement a rigid credit policy, encourage customers to pay on time with discounts & incentives and penalize late-paying customers.

High DSO vs Low DSO

A company may have either a higher or lower DSO. An average Days Sales Outstanding (DSO) of 45 days can be considered satisfactory for most large companies whereas it may be problematic for small companies that often face cash flow issues.

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