What is Days Sales Outstanding?

What is Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) is a metric that measures the average number of days it takes for a business to collect payment from its customers. It is calculated by dividing the total accounts receivable for a given period by the total sales for the same period and multiplying the result by the number of days in the period.

For example, if a business has £50,000 in accounts receivable and £100,000 in sales over a 30-day period, its DSO is 15 days. This means that the business takes an average of 15 days to collect payment from its customers.

How to Calculate Days Sales Outstanding (DSO) Calculating DSO is relatively straightforward. Follow these steps to calculate your business’s DSO:

Step 1: Gather the necessary data

You will need the accounts receivable and sales figures for the period you wish to analyse.

Step 2: Calculate the DSO

Divide the total accounts receivable by the total sales and multiply the result by the number of days in the period. For example, if a business has £50,000 in accounts receivable and £100,000 in sales over a 30-day period, its DSO is 15 days.

Step 3: Interpret the results.

The lower the DSO, the faster a business is able to collect payment from its customers. A high DSO indicates that the business may have issues with collecting payments from customers.

How to Interpret Days Sales Outstanding (DSO) DSO can provide valuable insight into a business’s financial health and its ability to effectively manage cash flow. A low DSO indicates that the business is able to collect payments quickly, while a high DSO indicates that the business may have difficulty collecting payments from customers.

Additionally, businesses can use DSO to set realistic payment terms. Having a low DSO can help businesses negotiate more favourable payment terms with their customers.