Days Sales Outstanding (DSO) is an accounts receivable term that measures the average amount of time to collect funds from credit sales.
The DSO measurement is a good indicator of the effectiveness of accounts receivable management.
How to Calculate DSO
As invoices remain unpaid past their due dates, accounts receivable increases and so does days sales outstanding. A formula for calculating DSO is:
DSO = (Average accounts receivable balance / Total sales in a given period)
(x) Number of days in that period
For instance, let's say the average accounts receivable balance of a company is $200,000 and we want to measure DSO for the year. Total sales is $1,500,000. The formula would be 200,000 divided by 1,500,000 and that total would be multiplied by 365. The average days sales outstanding, or the average collection period for this company's invoices, is 48.6.
What is a good DSO?
A "good" DSO can be different according to several factors:
- The average DSO for your industry
- The size of the company
- The payment terms of your company invoices
Generally, your average DSO shouldn't be exceed your payment terms by more than half. In the above example, an average DSO of 48.6 days may be too high for a company whose payment terms are 30 days.
DSO can also be tracked monthly to determine any seasonal trends or indications that your company's collection efforts may be slipping. A high DSO could also mean that your credit checks or payment terms need to be more stringent. A low DSO could mean that your collections efforts and credit checks are effective. Or it may mean less credit sales for that particular time of year.
DSO should be used in conjunction with the company's aging report as well as other measurements like accounts receivable turnover ratio.