What is Days Sales Outstanding?
Days Sales Outstanding is a metric which measures the average number of days that it takes your business to collect payment after a sale has been made. By understanding the rate at which customers are paying for goods and services, your business can gain insight into the health of their cash flow.
Calculating Days Sales Outstanding
DSO = (Accounts Receivables / Net Credit Sales) X Number of Days
- Accounts Receivable $100,000
- Net Credit Sales $80,000
- Days to Pay 30
- DSO = 37.5
A high DSO may suggest the following:
- Low cash sales
- Bad collection process (inc. bad credit checks)
A high DSO indicates that your company is experiencing a hard time when converting credit sales to cash. However, depending on the type of business and its financial structure, your company may operate with DSOs of 90 or higher
A low DSO can be especially important for your business if it relies on timely payments from customers to operate, as it allows you to plan your cash flow accordingly.
What Are the Hidden Costs of DSO?
Your business may have to borrow money to fulfill orders and pay interests on those loans. You may also miss out on lucrative opportunities for not being liquid.