Days sales outstanding

Days sales outstanding

In accountancy, Days Sales Outstanding (also called Days Receivables) is a calculation used by a company to estimate their average collection period. A low number of days indicates that the company collects its outstanding receivables quickly. Typically, Days sales outstanding is calculated monthly. The days sales outstanding (DSO) figure is an index of the relationship between outstanding receivables and credit account sales achieved over a given period. The Days sales outstanding analysis provides general information about the number of days on average that customers take to pay invoices.

Days sales outstanding is considered an important tool in measuring liquidity. Days sales outstanding tends to increase as a company becomes less risk averse. Higher Days sales outstanding can also be an indication of poor follow up on delinquencies, or higher DSO might be the result of inadequate analysis of applicants for open account credit terms. An increase in DSO can result in cash flow problems, and may result in a decision to increase the creditor company's bad debt reserve.

Days Sales Outstanding, or DSO, is calculated as: Total Outstanding Receivables at the end of the period analyzed divided by Total Credit Sales for the period analyzed (typically 90 or 365 days), times the number of days in the period analyzed. That is,

DSO = (Receivables/Sales) * Days in Period (can use average receivables as a more conservative estimate)

Days sales outstanding can vary from month to month, and over the course of a year with a company's seasonal business cycle. Of interest when analyzing the performance of a company is the trend in DSO. If DSO is getting longer, customers are taking longer to pay their bills, which may be a warning that customers are dissatisfied with the company's product or service, or that sales are being made to customers that are less credit-worthy, or that salespeople have to offer longer payment terms in order to generate sales. It could also mean that the company has an inefficient or overburdened credit and collections department. Many financial reports will state Receivables Turnover defined as Net Credit Account Sales / Trade Receivables; divide this value into the time period in Days to get DSO.

However, Days sales outstanding is not the most accurate indication of the efficiency of accounts receivable department. Changes in sales volume influence the outcome of the days sales outstanding calculation. For example, even if the overdue balance stays the same, an increase of sales can result in a lower DSO. A better way to measure the performance of credit and collection function is by looking at the total overdue balance in proportion of the total accounts receivable balance (total AR = Current + Overdue), which is sometimes calculated using the Days Delinquent Sales Outstanding (DDSO) formula.

See also

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Days Sales Outstanding — In accountancy, Days Sales Outstanding is a company s average collection period. A low number of days indicates that the company collects its outstanding receivables quickly. Typically, DSO is calculated monthly. The Days Sales Outstanding (DSO)… …   Wikipedia

  • Days Sales Outstanding — Der Begriff Days Sales Outstanding bzw. Forderungslaufzeit bezeichnet als Mittelwert die Anzahl von Tagen, die vom Zeitpunkt der Rechnungsstellung (= Rechnungsdatum) bis zum Zahlungseingang auf dem Bankkonto bzw. in der Kasse des Lieferanten… …   Deutsch Wikipedia

  • days' sales outstanding — The amount of sales outstanding expressed in days. For example, if £5000 worth of sales were made per day and £50,000 worth of sales were outstanding, this would represent 10 days (£50,000/£5000) of sales outstanding …   Accounting dictionary

  • Days' sales outstanding — Average collection period. The New York Times Financial Glossary …   Financial and business terms

  • days' sales outstanding — Average collection period. Bloomberg Financial Dictionary …   Financial and business terms

  • Days sales outstanding ratio — DSO ratio, or days sales outstanding ratio, or days sales outstanding ratio, is a financial ratio that illustrates how well a company s accounts receivables are being managed. A DSO ratio can be expressed as: DSO ratio = accounts receivable /… …   Wikipedia

  • Days Sales Outstanding - DSO — A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows… …   Investment dictionary

  • Срок инкассации по продажам (DAYS SALES OUTSTANDING)  — Средний срок в днях, который проходит до момента погашения дебиторской задолженности (при реализации в кредит). Этот срок сравнивается с условиями предоставления кредитов заказчикам для оценки качества кредитного управления компании. Обычно этот… …   Словарь терминов по управленческому учету

  • Days payable outstanding — (DPO) is an efficiency ratio that measures the average number of days a company takes to pay its suppliers. The formula for DPO is: where ending A/P is the accounts payable balance at the end of the accounting period being considered and COGS/day …   Wikipedia

  • Days Sales Of Inventory - DSI — A financial measure of a company s performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower (shorter) the DSI the… …   Investment dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”