What Is Days Outstanding Sales? With Formula and Example
By Indeed Editorial Team
Updated November 21, 2022 | Published March 20, 2020
Updated November 21, 2022
Published March 20, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When monitoring a company's cash flow, days outstanding sales, or days sales outstanding (DSO), is an important metric to consider. The DSO formula helps evaluate a company's ability to collect receivables by determining whether there's a positive or negative trend in the amount of time it takes a company to collect payment after a sale. Learning more about this payment metric can help you optimize business earnings by discovering areas for improvement within a payment process.
In this article, we describe days outstanding sales and why it's important, we provide the formula to calculate DSO and an example, and we answer some frequently asked questions about this metric.
Days outstanding sales, or days sales outstanding (DSO), is a metric that determines the average number of days that it takes a company to collect full payment from a customer after a sale.
A low DSO score means that a company doesn't take long to fully receive payment, while a high score means that a company may be losing money by having to wait longer to receive payment.
By analyzing DSO trends, a company can understand if there's room for improvement in its collections or sales departments.
What is the days outstanding sales (DSO) metric?
Days outstanding sales refers to the average number of days it takes a company to fully collect payment after making a sale. Companies use DSO to measure the success of their credit and collection efforts. You can calculate this measure on a monthly, quarterly or annual schedule. Looking at trends for this metric over time can help you learn about any potential cash flow or collection issues before they become unmanageable. In general, you can consider any DSO under 45 days as being generally efficient.
DSO is an important tool for measuring a business' liquidity, or its availability of liquid cash assets. If a company has a low DSO, that means that it doesn't take long to receive payments, allowing the company to put that revenue back into the company quickly. A high DSO may mean that the company has delays in the payment process, which can cause cash flow issues. In many ways, DSO measures the balance between the company's sales efforts and collection efforts. It's important to consider both of these processes and their interactions if a company experiences cash flow problems.
Why is the days outstanding sales (DSO) metric important?
The days outstanding sales metric is important because it's crucial that companies receive payment for services in a timely manner. Understanding how long it takes to receive payment can help a company learn more about the performance of its collections department and look for potential areas of improvement. If a company has a particularly high DSO, it may want to evaluate the performance of its collections department to see if there are ways to expedite the process. This is especially true if the company notices that the DSO shows a pattern of increasing each year or month.
Even when a company is confident that it may receive payment eventually, it can lose money when it has to wait a long period of time to collect cash from customers. This is because of the time value of money principle, which states that a sum of money is worth more now than in the future based on its current earning potential. For example, if a company receives customer payment immediately, it can reinvest that money in product development, ultimately leading to improved offerings and higher profits.
Formula for calculating days outstanding sales
To calculate the number of days on average that it takes for a company to retain its accounts receivable as cash, you can use the following formula. In this case, accounts receivable refers to the amount of money that a company hasn't yet received from customers after they've made a purchase:
DSO = (accounts receivable / annual revenue) x number of days in the year or month
For example, if a company had an accounts receivable balance of $50,000 and had annual sales of $1 million, the DSO formula would look like this:
($50,000 / $1,000,000) x 365 days in the year = 18.25 days outstanding sales
This means that, on average, it takes the company 18.25 days to fully receive customer payment.
Example of days outstanding sales
If you're looking to better understand DSO, here's an example to help illustrate this concept:
Alan Brothers Lawn Care reported revenue of $25,000 for June 2018. During June, the company had $10,000 in accounts receivable. Since there are 30 days in the month, the formula would look like this:
($10,000 / $25,000) x 30 days = 12 days in outstanding sales
Next, the owners wanted to look at June 2019 to see whether the trend improved. In June 2019, the company earned $35,000, with a total of $18,000 in accounts receivable. The formula for that month would look like this:
($18,000 / $35,000) X 30 days = 15.43
In this case, the length of time for collecting accounts receivable increased over the year but only by a few days. The business is still far behind the 45-day mark, though, which means its time for collecting cash is still somewhat efficient. By recognizing that the trend seems to be increasing, the accounting department can monitor the DSO more closely and determine whether anything is causing the increase.
Related: How To Find Revenue
Days outstanding sales FAQ
These commonly asked questions can offer more information about the concept of DSO:
Why is it important to evaluate DSO?
By evaluating DSO at a customer level, a company can determine whether the customer is having cash flow problems. This is usually evident when a customer delays the amount of time before paying an invoice. Recognizing this allows a business to make changes to better meet the needs of the customer, such as modifying the terms of service or breaking invoices into smaller payments.
Related: 16 Invoice Types (Plus Functions)
What does increasing DSO mean?
An increasing DSO can mean more than just cash flow problems for a company. It can also suggest the following:
Customer satisfaction is declining, as customers may put off paying for products they don't enjoy.
Salespeople are offering longer terms of payment.
Customers with poor credit are making purchases on credit, leaving them unable to pay on time.
The company is inefficient in collection processes.
What does low DSO mean?
Conversely, a low DSO reflects favorably on a company's collection processes. It can indicate that customers are happy with the service they're receiving, that they're paying on time to take advantage of discounts or that the company has a strict credit policy. Regardless of the reason customers choose to pay invoices quickly, a low DSO carries several benefits for businesses, including the ability to cover operational expenses and reinvest cash in the business to increase future earnings.
How can businesses evaluate DSO trends?
Tracking a DSO on a trend line, month by month, is an effective method of monitoring changes in a company's ability to collect payment from customers. If a company is highly seasonal, consider comparing the measurement from one part of the year—ideally a busy season—to the same month during the previous year. This can help you better determine whether the company is making improvements in collecting receivables from customers.
What constitutes a high or low DSO can vary depending on the industry, business type and structure. In general, though, any DSO under 45 days is considered low. If you're using DSO to evaluate cash flow trends for different companies, it's important to compare companies in the same industry—ideally those that have similar business models—since the DSO can change based on business and structure.
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