20 October 2024
What is DSO (Days Sales Outstanding)? Definition of Days Sales Outstanding (DSO) is a financial metric used by businesses to measure the average number of days it takes to collect payment from customers after a sale has been made.
The Meaning of DSO (Days Sales Outstanding) Explanation
DSO Meaning in Finance & Accounting
Days Sales Outstanding: In finance and accounting, DSO refers to the average number of days it takes a company to collect payment from its customers after a sale. It is a measure of a company’s accounts receivable efficiency and is often used to assess the effectiveness of a company’s credit and collection policies.
Days Sales Outstanding (DSO) Meaning in English, Hindi, Tamil, Urdu, Marathi:
- DSO Meaning in English: Days Sales Outstanding.
- DSO Meaning in Hindi: बिक्री लश्कर प्रमुख (डीएसओ).
- DSO Meaning in Tamil: விற்பனை முடிந்த நாட்கள்.
- DSO Meaning in Urdu: دنوں میں فروخت بقاء .
- DSO Meaning in Marathi: दिवस विक्री आउटस्टॅंडिंग (डीएसओ).
DSO is a key indicator of a company’s accounts receivable management and its ability to efficiently convert its sales into cash.
DSO Formula
DSO Calculation Formula
The term “DSO” stands for “Days Sales Outstanding,” which is a financial metric used to measure the average number of days it takes for a company to collect payment from its customers after a sale has been made. DSO is also known as “Accounts Receivable Days” or “Average Collection Period.”
The formula to calculate DSO is:
DSO = (Accounts Receivable / Total Credit Sales) x Number of Days in the Period
Where:
- Accounts Receivable: This is the total amount of money that customers owe to the company for products or services they have purchased on credit. It represents the outstanding invoices that have not yet been collected.
- Total Credit Sales: This is the total amount of sales made on credit during a specific period. It does not include cash sales.
- Number of Days in the Period: This represents the time frame for which you want to calculate DSO. It could be a monthly, quarterly, or annual period, depending on your needs.
To calculate DSO, you divide the total accounts receivable by the total credit sales and then multiply the result by the number of days in the period. The result will give you the average number of days it takes for the company to collect payments from its customers.
A lower DSO indicates that a company is collecting payments more quickly, which can be a sign of efficient accounts receivable management. Conversely, a higher DSO suggests that it takes longer for the company to collect payments, which may have implications for cash flow and liquidity.
DSO Examples
DSO Calculation Examples
Here are a few examples to help you understand DSO:
Example 1: Retail Store
Imagine a small retail store that sells clothing. At the beginning of the year, they have accounts receivable (unpaid invoices) totaling $10,000.
Throughout the year, they make sales on credit and receive payments from customers. At the end of the year, their accounts receivable have reduced to $5,000.
To calculate their DSO:DSO = (Accounts Receivable / Total Credit Sales) x Number of Days in Period
Let’s assume they had total credit sales of $50,000 during the year. DSO = ($5,000 / $50,000) x 365 days = 36.5 days.
In this case, the retail store’s DSO is 36.5 days, which means, on average, it takes them 36.5 days to collect payment after making a sale on credit.
Example 2: Software as a Service (SaaS) Company
Consider a SaaS company that provides monthly subscriptions for its software products. They have accounts receivable of $30,000 at the beginning of the month.
Throughout the month, they bill their customers for subscriptions, and by the end of the month, their accounts receivable have decreased to $20,000.
To calculate their DSO for the month:DSO = (Accounts Receivable / Total Monthly Credit Sales) x Number of Days in Month.
Let’s assume they had total credit sales of $100,000 during the month.DSO = ($20,000 / $100,000) x 30 days = 6 days.
In this case, the SaaS company’s DSO for the month is 6 days, indicating that, on average, it takes them 6 days to collect payment from their customers.
Example 3: Manufacturing Company
A manufacturing company sells industrial equipment and often has longer credit terms with its customers. At the beginning of the quarter, they have accounts receivable of $500,000. By the end of the quarter, their accounts receivable have reduced to $400,000.
To calculate their DSO for the quarter:DSO = (Accounts Receivable / Total Credit Sales for the Quarter) x Number of Days in Quarter.
Assuming they had total credit sales of $2 million during the quarter and a quarter with 90 days:DSO = ($400,000 / $2,000,000) x 90 days = 18 days.
In this example, the manufacturing company’s DSO for the quarter is 18 days, suggesting that, on average, it takes them 18 days to collect payment after making a sale on credit.
These examples illustrate how Days Sales Outstanding can vary across different types of businesses and industries and how it’s calculated based on the accounts receivable and credit sales within a specific period. A lower DSO typically indicates more efficient accounts receivable management, whereas a higher DSO may suggest potential issues with collections or credit policies.
Days Sales Outstanding FAQ
What is best days sales outstanding?
The best days sales outstanding (DSO) is the lowest number of days it takes for a company to collect payment from its customers after a sale is made. It is an indicator of how efficiently a company manages its accounts receivable.
What is the difference between days sales outstanding and days receivable?
The difference between days sales outstanding (DSO) and days receivable is that DSO focuses on the average number of days it takes to collect payment from customers, while days receivable specifically refers to the average number of days it takes to collect payment from accounts receivable.
What is the opposite of days sales outstanding?
The opposite of days sales outstanding is the days payable outstanding (DPO), which measures the average number of days it takes for a company to pay its suppliers or vendors after a purchase is made. DPO is an indicator of how effectively a company manages its accounts payable.