See also:
Accounts Receivable Turnover Analysis
How to Collect Accounts Receivable
Cash Cycle
Download Tool
Daily Sales Outstanding (DSO) Definition¶
Daily Sales Outstanding (DSO) is a useful formula to measure the average age of
accounts receivable. As a management tool, it can be used to measure and motivate employee performance.
Though the number of days is useful, it is often the trend of that number that is most important. If the length of time is trending up then immediate action is often required.
Comparison to the industry average is an important benchmark for performance. If competitors in your industry are collecting in fewer number days then the potential for improvement is often present.
The calculation of Days Sales Outstanding(DSO) on a frequent basis is a powerful management technique. This can be accomplished through the accounting package or included as a key performance indicator (KPI) in the
flash report. The formula can also be expressed through a days sales outstanding ratio.
Daily Sales Outstanding Formula¶
The dso formula is the basic way to calculate daily sales outstanding. In application a very valuable performance indicator becomes evident. The dso calculation formula can be used as below:
Daily Sales Outstanding = 365 X (Average Accounts Receivable / Total Credit Sales)
Daily Sales Outstanding Calculation¶
The calculation of dso days requires little more than a basic understanding of mathematics. Maintaining proper financials allows this and other essential calculations to be performed. The days sales outstanding formula, ultimately, leads to monitoring the health and wealth of your business.
Example: Assume Total
Credit Sales are $1,000,000 and Average Accounts Receivable is $100,000.
(DSO) Days Sales Outstanding Calculation: 365 X (100,000 / 1,000,000) = 36.5 days
This is a simplified explanation of how to calculate daily sales outstanding. A trained CFO can provide more extensive analysis and solutions.
Daily Sales Outstanding Example¶
Karen owns a interior design company called Designco. The company provides services to create a welcoming and professional office. Karen's company is growing very quickly after she was highlighted in a local business magazine. This has forced her to sell and service clients at a level she had never experienced before. Over time some of her accounts receivable sat idly while she satisfied new customers. Though overworked, Karen has begun to settle into her place in the market. Her experience tells her that now is the time to align her business to deal with this new volume of interest. Upon evaluating her progress she noticed that some of her receivables sat in wait. This has sparked her curiosity into what her daily sales outstanding ratio looks like. She asks her CPA "how is dso calculated"? He provides her with this information:
Total Credit Sales $ 1,000,000
Average Accounts Receivable $ 100,000
Days Sales Outstanding Calculation: 365 X (100,000 / 1,000,000) = 36.5 days
Karen is not satisfied with this. Her CPA, an expert in all forms of managerial accounting, provides days sales outstanding analysis and some solutions to choose from.
With this Karen decides to use a
factoring company to solve the problem. Her reasons are two-fold: she will be able to outsource her collections while instantly gaining the cash necessary to begin creating a more permanent solution. Karen does her due diligence, finds a responsible factoring company which will conduct operations with the same level of professionalism as she does, and sells her uncollected receivables. Karen is satisfied with her decision because it provides both a long and short term solution.
Karen's days sales outstanding example is very common. This proves a powerful message to monitor cash flow: it is one of the most common reasons why businesses fail.
Daily Sales Outstanding Meaning¶
Daily sales outstanding (dso) is an acknowledgement of the importance of cash in business. Due to this, it is in the company's best interest to collect due payments as quickly as possible. Through evaluation of dso businesses can see the average amount of time before accounts receivable are collected, a measurement of a company's ability to collect cash in waiting, and a metric useful to evaluate the performance of the collections department of a company. The daily sales outstanding ratio steps further to provide the average amount of time sales stand uncollected as compared to total sales. Dso, daily sales outstanding, is often also combined with other
financial ratios to form the slew of combined evaluation tools. It is, overall, one of the most important factors which can lead to the success of a business.
Resources
For statistical information about industry financial ratios, please go to the following websites:
www.bizstats.com and
www.valueline.com.