Days sales outstanding (DSO)
Days sales outstanding may be defined as an average period of time which passes from a moment when the given firm collects revenue after a sale has been made. It is calculated by dividing accounts receivable with total credits sales and then multiplying it with a number of days, for which you are calculating the days sales outstanding. It can be low or high, depending how leisurely the company is. If the number is high, that means the more time passes between the sale and collecting revenue, which means that the company is selling to customers on credit, giving them more time. If the number is lower, that means that the company needs fever days to collect the money.
Calculating days sales outstanding
DSO can be calculated by the following formula: accounts receivable are divided by total credit sales and multiplied by the number of days.
Days sales outstanding is calculated usually on a monthly or quarterly basis, and is used for providing general information about company business. If the number is high, it means that the company is either ineffective at collecting money from customers, or that the companies buying the product are having problems with paying. Also, it can make problems for the company in the future, given the cash flow problems. On the other hand, if the number is too low, it may mean that the company is too rigorous for its own good and it may very well be hampering its own sales.
Significance of DSO can be expressed through the following example. If a company makes an agreement with customers to pay for receivables within 15 days, it would want its days sales outstanding to be around that number. Some will pay sooner, and some would not be so punctuate. A company interested in making good business should have a days sales outstanding which matches their sales product and their client’s needs, giving them the just right time to pay for the receivables and on the other hand still making sure it is not too leisure with giving them credit, because it could lead to company’s downfall. Not all products or clients are equal; they are different in many ways and they should be treated as such. Giving just the right time for clients to pay is one of the most important things in making good business and will lead to having good, reliable clients for years to come.