days sales outstanding

Credit sales, however, are rarely reported separate from gross sales on the income statement. As a metric attempting to gauge the efficiency of a business, days sales outstanding comes with a limitation that is important for any investor to consider. If a company’s DSO is increasing, it’s a warning sign that something is wrong. Customer satisfaction might be declining, or the salespeople may be offering longer terms of payment to drive increased sales.

Offer discounts to encourage early payments:

Doing so shows any changes in the ability of the organization to collect from its customers. If a business is highly seasonal, a variation is to compare the measurement to the same metric for the same month in the preceding year; this provides a more reasonable basis for comparison. A modern AR automation platform can be your business’ lifeline when it comes to staying on top of days sales outstanding and maintaining control of your cash position.

Good and Bad DSO Numbers

This metric provides valuable insights into the efficiency of the company’s accounts receivable management. (DSO) is the average number of days that receivables remain outstanding before they are collected. It is used to determine the effectiveness of a company’s credit and collection efforts in allowing credit to customers, as well as its ability to collect from them. When measured at the individual customer level, it can indicate when a customer is having cash flow troubles, since the customer will attempt to stretch out the amount of time before it pays invoices.

What’s the difference between a high and low DSO?

On the other hand, a higher DSO means it’s taking longer for customers to pay, which can be problematic, like café customers taking weeks or months to settle their tabs. Tune in to learn how AR automation can transform your collections process, improve cash management, and delight your customers. Another way to improve your cash flow is to require a deposit before starting work, or to agree payment terms that require progress payments.

days sales outstanding

Understanding Days Sales Outstanding (DSO)

  • This could be because the business lacks customers who pay on time or its collections procedure is inefficient.
  • For example, A/R is forecasted to be $33mm in 2021, which was calculated by dividing 55 days by 365 days and multiplying the result by the $220mm in revenue.
  • Remember the longer the inventory sits on the shelves, the longer the company’s cash can’t be used for other operations.
  • Delinquent Days Sales Outstanding (DDSO) is a good alternative for credit collection assessment or for use alongside DSO.
  • Given that John was targeting a 30-day collection period, his DSO of 31 days is good for his business.
  • Simply put, a high DSO indicates that a business takes more days to collect its dues.

Some AR automation tools allow customers to make payments from their account on a set timeline automatically. This way, customers have less to think about and you know for sure you’ll be paid on time. An accounts receivable automation platform can make it much easier to track discounts and credits, assign them to the right customers, and reconcile the changes in your financial management system. Discounts for early payments are a great way to incentivize customers to pay faster. But because managing discount eligibility and applying those discounts to invoices properly can be a nightmare, teams are often hesitant to use them.

  • All you have to do is divide your final accounts receivable by the total credit sales for the period (monthly/quarterly/annually) and multiply it by the number of days in the time period.
  • “Days Sales Outstanding” (DSO) is a financial metric that indicates the average number of days it takes a company to collect payment after making a sale.
  • The sales figure of a company will always be reported in the company’s income statement.
  • Days sales outstanding is also sometimes referred to as “days sales in receivable”.
  • This way, customers have less to think about and you know for sure you’ll be paid on time.

Common Instances Where Organizations Misinterpret DSO?

days sales outstanding

When it comes time to collect payments from customers, don’t delay on getting invoices sent out. You may not always be able to control how quickly customers pay you once they have your invoice in hand. But sending out invoices as quickly as possible once you’ve delivered a product or service is one action you can take to improve the speed of payments. But your ideal days-sales-outstanding ratio depends on your industry and type of business. In 2018, the average DSO number was 40 days among non-financial companies analyzed by the Hackett Group., or DSO, is a measure of how quickly a company can collect its money from its customers.

How to calculate DSO?

Using the Accounts Receivable Days ratio of ~51.43 that we found earlier, we can then compare it to the 30-day company standard. Increase the likelihood of your getting paid on time by nudging customers with friendly reminders as a payment date approaches. Getting away from highly manual AR processes in favor of automation improves your ability to collect on receivables quickly.

days sales outstanding

While calculating accounts receivable days gives valuable insight into the effectiveness of a company’s collection process, it is an account-focused approach. For instance, if you were calculating your DSO for January to March, you would multiply the quotient by 90 days. In this article, we’ll explain what days sales outstanding is, the value of tracking it, and how to calculate it. We’ll also explore the average DSO values across industries to help you benchmark your performance and provide strategies for improving your DSO accounting methods. Actively monitoring DSO not only tracks cash flow efficiency but also signals when it’s time to enhance credit policies or collection methods. Keeping DSO aligned with industry standards ensures a company can cover its immediate needs, seize growth opportunities, and maintain leverage in financial negotiations.

While DSO focuses on speeding up cash inflow, DPO aims at delaying outflows to optimize working capital. Together, these two metrics reflect how efficiently a company manages its receivables and payables, or overall cash flow. Including information on your invoices like due days, payment terms and options can help keep you and your customers on the same page. Use an invoice template that includes all of these important details, like the invoices generated by QuickBooks’ free invoice generator, or free invoice templates. If your business has a high DSO, consider evaluating your credit policies, including to whom you extend credit.