To run a successful business, every company should be aware of its Days Sales Outstanding (DSO). This metric measures the average number of days that a company takes to collect its receivables. In other words, it’s a key indicator of how quickly a company is being paid by its customers.
It is an important measure that can give insights into a company’s collections efficiency, and how well it is managing its working capital. In this article, we will discuss what DSO is, how to calculate it, and what are some examples of DSO.
What is DSO or Days Sales Outstanding
Days Sales Outstanding or DSO is a measure of the average number of days that it takes companies and businesses to collect their receivables. It is an important metric for both creditors and investors, as it can give insights into a company’s collections efficiency and working capital management.
A high DSO means that the company is taking a long time to collect its receivables, which could tie up valuable resources that could be used elsewhere. On the other hand, a low DSO indicates that the company is collecting payments quickly, which could be a sign of good financial health.
The formula of DSO
The formula of DSO is pretty straightforward, here is the formula
(Accounts Receivable / Net Credit Sale) X Number of Days = DSO
- Accounts Receivables: This is the total amount of money that the company is owned by its customers. It is the sum of all the invoices that have been sent to customers but not yet paid.
- Net Credit Sales: Net credit sales are the total amount of revenue that the company has generated from sales to its customers, minus any returns and discounts.
- Number of Days: This is simply the number of days between the date of the sale and the due date of the invoice. This means that the number of days will be different for each company, depending on its billing cycle.
Examples of DSO calculation
Let’s say that during April, a company called Real Steel has made a total of $600,000 in credit sales and had $450,000 in accounts receivable. There are 30 days in April. So now let’s calculate the company’s DSO using the formula above.
(Accounts Receivable / Net Credit Sale) X Number of Days = DSO
$450,000 / $600,000 X 30 days = 22.5 days
This means that on average, it takes Real Steel 22.5 days to collect its receivables.
Let’s take a look at another example. Let’s say, during May, a company called Gotham City has made a total of $1,200,000 in credit sales and had $980,000 in accounts receivable. There are 31 days in May. So now let’s calculate Gotham City’s DSO using the formula above.
(Accounts Receivable / Net Credit Sale) X Number of Days = DSO
$980,000 / $1,200,000 X 31 days = 25.2 days
This means that on average, it takes Gotham City 25.2 days to collect its receivables.
AS you can see from the two examples above, the DSO can differ from one company to another, depending on the size of the company and the industry it is in.
Conclusion
In this article, we have discussed what Days Sales Outstanding is, how to calculate it, and what are some examples of DSO. DSO or Days Sales Outstanding is an important metric that helps to identify a company’s financial health. We hope you found this information helpful. Thank you for reading.
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