What is ‘Days Sales Outstanding – DSO’
Days sales outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. DSO is often determined on a monthly, quarterly or annual basis and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured.
Explaining ‘Days Sales Outstanding – DSO’
Due to the high importance of cash in running a business, it is in a company’s best interest to collect outstanding receivables as quickly as possible. While companies can most often expect with relative certainty that they will in fact receive outstanding receivables, because of the time value of money principle, money that a company spends time waiting to receive is money lost. By quickly turning sales into cash, a company has a chance to put the cash to use again more quickly. Ideally, the company will use it to reinvest and thereby generate more sales. A high DSO value may lead to cash flow problems because of the long duration between the time of a sale and the time the company receives payment. In this respect, the ability to determine the average length of time that a company’s outstanding balances are carried in receivables can in some cases tell a great deal about the nature of the company’s cash flow.
Uses of ‘Days Sales Outstanding – DSO’
Days sales outstanding has a wide variety of applications. It can indicate the amount of sales a company has made during a specific time period, how quickly customers are paying, if the company’s collections department is working well, if the company is maintaining customer satisfaction or if credit is being given to customers that are not credit worthy.
Limitations of ‘Days Sales Outstanding – DSO’
Like any metric attempting to gauge the efficiency of a business, days sales outstanding comes with a set of limitations that are important for any investor to consider before using it.
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