Debt Collection Services

Days Sales Outstanding (DSO)

By July 13, 2020September 24th, 2020No Comments

The Days Sales Outstanding financial indicator shows both the age, in terms of days, of a company’s accounts receivable and the average time it takes to turn the receivables into cash. The DSO can be compared to industry and company averages, as well as company selling terms enabling you to determine how your receivable function is performing and the acceptability of such performance.

There are several methods of calculating DSO, including a regular calculation and a best possible calculation.

Regular DSO

Regular DSO measures the time it takes to collect your receivables. It will provide you with a clear understanding of your internal collection efficiencies.

To calculate your Regular DSO, three pieces of information are required:

  • Total Receivables
  • Total credit sales for the period analyzed
  • The Number of days in the period analyzed

Formula

Regular DSO = (Total Receivables/Total Credit Sales) x Number of Days
Example:

Total Receivables = $4,600,000
Total Credit Sales = $9,000,000
Number of days in period = 90

Regular DSO (4,600,000/9,000,000) X 90 = 45.6 days

On average, it therefore takes 46 days to collect your receivables.

Best Possible DSO

Using only the current portion of receivables, the Best Possible DSO yields insight into delinquencies. As a measurement, the closer your regular DSO is to the Best Possible DSO, the closer your receivables are to the optimal level.

To calculate your Best Possible DSO three pieces of information are required:

  • Current Receivables
  • Total credit sales for the period analyzed
  • The Number of days in the period analyzed

Formula

Current Receivables/Total Credit Sales X Number of Days = Best Possible DSO

Example:
Current Receivables = $2,070,000
Total Credit Sales = $9,000,000
Number of days in period = 90

Best Possible DSO = 2,070,000/9,000,000 X 90 = 20.7 days

It helps to distinguish between length of selling terms and delinquency.

Important Details About DSO

Only credit sales are to be used. Cash sales are excluded.

“Days in Sales Period” is defined as follows:

Annual = 365 days
Six Months = 182 days
Quarter = 91 days

The receivable figure should represent only notes or accounts resulting from merchandise sales. Amounts due from the sale of fixtures, equipment, real estate, etc. are not to be included.

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