The Days Sales Outstanding (DSO) is an important financial indicator showing 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.

Days Sales Outstanding (DSO)

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. It is compared to industry and company averages, as well as company selling terms (e.g., Net 30) for determination of acceptability by the company. There are several methods of calculating DSO.

Regular DSO measures the time it takes to collect your receivables. It provides good understanding of the company's internal collection efficiencies, and requires three pieces of information for calculation:

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

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

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

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

It therefore takes 46 days (on the average) to collect your receivables.

To try this formula out go to the DSO Calculator.

Best Possible DSO

Best Possible DSO yields insight into delinquencies since it uses only the current portion of receivables. As a measurement, the closer the regular DSO is to the Best Possible DSO, the closer the receivables are to the optimal level.
Best Possible DSO requires three pieces of information for calculation:

• 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

2,070,000/9,000,000 X 90 = 20.7 days (best possible DSO)

It helps to distinguish between length of selling terms and delinquency.
To try this formula out go to the Best Possible DSO Calculator.

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.