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Days sales outstanding

Days Sales Outstanding (DSO) is a measure of how long it takes a company to collect money that it is due.

Contents

Expanded Definition

<math>DSO = \frac{Average\ accounts\ receivable}{\frac{Sales}{No.\ days\ in\ period}}</math>

  • Average accounts receivable is from the balance sheet and is the amount at the beginning of the period plus the amount at the end, divided by two.
  • Sales is the revenue line for the period from the income statement.
  • No. of days in period is 91 for a quarter or 365 for an entire year.

Days Sales Outstanding (DSO, for short) is one of the components of the cash conversion cycle, the measure of how quickly a company can move cash through the business. DSO itself measures how long cash is tied up outside of the company accounts receivable after a sale has been made, but before the company receives the cash.

A well-managed company should have low and declining DSO levels, indicating that the company has the power to insist on being paid for its goods or services. If the DSO value is increasing or is longer than comparable companies, then it could be losing control of its ability to receive payment and it might have to begin to write-off portions of its accounts receivable as noncollectable. This, of course, is a bad thing.

Because different industries have different levels of "normal," be sure to compare this among comparable companies, not across industries.

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