Days Sales Outstanding (DSO) – DSO shows how long it takes to collect cash from customers. There are 31 days in July, so Company A’s DSO for July can be calculated as: $350,000$500,000×31=0.7×31=21.7 days\frac{\$350,000} {\$500,000} \times 31 = 0.7 \times 31 = 21.7 \text{ days}$500,000$350,000×31=0.7×31=21.7 days. DSO and DIO finally show first improvement in five years. Like any metric attempting to gauge the efficiency of a business, days sales outstanding comes with a set of limitations that are important for any investor to consider before using it. Liquidity ratios are a class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital. The credit management facing a shock wave, The payment profile, a major advantage for an efficient management of your Accounts Receivable, Find Credit Management tools on your favorite social networks, Improve your processes with cash collection. Trade receivables usually represent in average about 30% of total balance sheet of companies. It may be that customers are taking more time to pay their expenses, suggesting either that customer satisfaction is declining, that salespeople within the company are offering longer terms of payment to drive increased sales, or that the company is allowing customers with poor credit to make purchases on credit. What Does Days Sales Outstanding Tell You? Not yet registered? The DSO has a direct impact on the Working Capital Requirement (WCR), the cash and the overall risk to have unpaid invoices and bad debts. ... DSO has shown its first improvement in five years as companies have begun to tap into the asset side of the balance sheet. The subscription allows downloading and unlimited use of all files of Credit Management tools. DSO is often determined on a monthly, quarterly or annual basis, and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured. Furthermore, DSO is not a perfect indicator of a company’s accounts receivable efficiency, as fluctuating sales volumes can affect DSO, with any increase in sales frequently lowering the DSO value. How crisis show how people and companies are? Faster sales collections have a positive working capital impact. By quickly turning sales into cash, a company has a chance to put the cash to use again more quickly. Investopedia uses cookies to provide you with a great user experience. Working capital management is a strategy that requires monitoring a company's current assets and liabilities to ensure its efficient operation. Days sales outstanding is an element of the cash conversion cycle and is often referred to as days receivables or average collection period. By using Investopedia, you accept our. addressing poor working capital performance. Generally speaking, a DSO under 45 days is considered low; however, what qualifies as a high or low DSO may often vary depending on business type and structure. As a hypothetical example, suppose that during the month of July, Company A made a total of $500,000 in credit sales and had $350,000 in accounts receivable. This cause indicates a flaw in the analysis of customer risk and in securing receivables, Late payment due to lack of customer reminders. In effect, the ability to determine the average length of time that a company’s outstanding balances are carried in receivables can in some cases tell a great deal about the nature of the company’s cash flow. Full Kit of Credit Management reporting including 5 tools: DSO calculation tool which allow to manage the accounts receivable performance from a cash and working capital standpoint. Working capital in financial modeling. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. DSO … Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resources into cash flows. All news about collection and credit management, Tutorial about the use of Tangible Net Worth to assess customer creditworthiness, My DSO Manager, the credit management software in Alpine style, Tutorial to understand and analyze the balance sheet. With a DSO of 21.7, Company A has a short average turnaround in converting its receivables into cash. Das Working Capital ist eine wichtige Bilanzkennzahl, die ausdrückt, wie finanzkräftig ein Unternehmen ist. Days Sales Outstanding - DSO: Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment after a sale has been made. Like any metric measuring a company’s performance, DSO should not be considered alone, but instead should be used with other metrics as well.