Days Sales Outstanding (DSO): Definition & Formula | Jirav
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What is DSO?
DSO is a measure of the average number of days it takes for a company to collect payments after a sale has been made. In other words, it's the amount of time it takes for a company to convert its accounts receivable into cash.
Why DSO Is Important
DSO is an important metric for businesses as it indicates how quickly they are able to collect payments from their customers. A high DSO can indicate that a company is experiencing cash flow issues, while a low DSO indicates that a company is able to collect payments quickly and efficiently.
A high DSO can also lead to a strain on a company's working capital, as cash is tied up in accounts receivable for longer periods of time. This can make it difficult for a company to pay its bills and meet its financial obligations in a timely manner.
How to Calculate DSO
To calculate DSO, divide the accounts receivable balance by the total credit sales for a given period, and then multiply that number by the number of days in that period. The formula for calculating DSO is:
DSO = (Accounts Receivable / Total Credit Sales) x Number of Days in Period
For example, if a company has $100,000 in accounts receivable and $500,000 in total credit sales for a 30-day period, the DSO would be:
DSO = ($100,000 / $500,000) x 30 = 6 days
This means that it takes the company an average of 6 days to collect payment from its customers after a sale has been made.
