Measuring Days Sales Outstanding

Note: Take advantage of the Days Sales Outstanding (DSO) calculator included in this article

Using DSO to Improve Cash Flow Management

Days Sales Outstanding (DSO) is a measure of how efficiently and quickly a company converts credit sales into cash and how much of its credit sales are tied up unproductively as accounts receivable. The lower the number, the more efficient the company is, and the less of its cash remains tied up as accounts receivable. It is a simple calculation:

For example, if a company has an average accounts receivable daily balance of $640,000 over 30 days and total credit sales of $742,000 for the same period, its DSO is 25.9 days.
DSO is a valuable indicator as it gives an indication of the efficiency of a company’s accounts receivable management as well as a tool to track changes in the quality of a company’s credit sales. Sales revenue earned but tied up in receivables cannot be used to fund operations, grow the business through investment, or be applied to retire costly debt.
What constitutes a good or bad level of DSO may be determined by your experience, but generally a DSO more than 30% greater than standard payment terms deserves collection action.

Days Sales Outstanding Calculator

An easy to use tool to help you calculate your business’s DSO.

What information you will need to have to perform the test:

1. Define the period.  This ideally should be a calendar year (January 1^st through December 31^st) but can be performed for any period (actual number of days).    

2. Specific Information.  You will need exact numbers for the period you define.  First is the total sales (from your Profit and Loss) and the second is the outstanding A/R (from your Balance Sheet) at the end of that period.

Input only numbers without commas.

Author: Marc J Marin