Day Sales Outstanding (D.S.O.)
The Days Sales Outstanding (DSO) is an important financial
indicator showing both the age, in terms of days, of a company's
accounts receivable and the average time it takes to turn
the receivables into cash.
Days Sales Outstanding financial indicator (DSO)
The Days Sales Outstanding financial indicator shows both
the age, in terms of days, of a company's accounts receivable
and the average time it takes to turn the receivables into
cash. It is compared to industry and company averages, as
well as company selling terms (e.g., Net 30) for determination
of acceptability by the company. There are several methods
of calculating DSO.
Regular DSO measures the time it takes to collect your receivables.
It provides good understanding of the company's internal collection
efficiencies, and requires three pieces of information for
calculation:
- Total Receivables
- Total credit sales for the period analyzed
- The Number of days in the period analyzed
Important Details About DSO
Only credit sales are to be used. Cash sales are excluded.
"Days in Sales Period" is defined as follows:
Annual = 365 days
Six Months = 182 days
Quarter = 91 days
The receivable figure should represent only notes or accounts
resulting from merchandise sales.
Amounts due from the sale of fixtures, equipment, real estate,
etc., are not to be included.
- Regular DSO Calculator
- Best Possible DSO
Regular DSO Calculator
Regular DSO measures the time it takes to collect your receivables.
It provides good understanding of the company's internal collection
efficiencies, and requires three pieces of information for calculation:
- Total Receivables
- Total credit sales for the period analyzed
- The Number of days in the period analyzed
Formula:
(Total Receivables/Total Credit Sales) x Number of
Days = Regular DSO
Example:
Total Receivables = $4,600,000.00
Total Credit Sales = $9,000,000.00
Number of days in period = 90
(4,600,000.00/9,000,000.00) X 90 = 45 days (regular
DSO)
It therefore takes 45 days (on the average) to collect your
receivables.
Using the calculator - be sure to use
the following format for the dollar amounts (########). Do
not use commas.
Best Possible DSO yields insight into delinquencies
since it uses only the current portion
of receivables. As a measurement, the closer the regular DSO
is to the Best Possible DSO, the closer the receivables are
to the optimal level.
Best Possible DSO requires three pieces of information for
calculation:
- Current Receivables
- Total credit sales for the period analyzed
- The Number of days in the period analyzed
Formula:
Current Receivables/Total Credit Sales X Number of
Days = Best Possible DSO
Example:
Current Receivables = $2,070,000.00
Total Credit Sales = $9,000,000.00
Number of days in period = 90
(2,070,000.00/9,000,000.00) X 90 = 20 days (best
possible DSO)
It helps to distinguish between length of selling terms and
delinquency.
Using the calculator - be sure to use
the following format for the dollar amounts (########). Do
not use commas.
