What is Days Sales Outstanding (DSO)?
Days sales outstanding is the measure of the average number of days that it takes a company to collect payment after a sale has been made. The formula for determining days sales outstanding, or DSO, is 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.
Why does a company want to have a low average days sales outstanding?
Since the days sales outstanding refers to how many days, on average, it takes a company to collect payment on any sales it has made, a low average means a company is collecting on its account receivables quickly. Doing so means the business runs less on credit and operates with a higher amount of cash, which it can utilize more quickly.
What are some ways to reduce a business’ days sales outstanding?
There are a number of recommendations for reducing the days sales outstanding average for a business, including:
- Define customer payment terms
- Review invoicing processes
- Manage accounts receivable carefully