Days Sales Outstanding (DSO) calculator is a tool that allows you to effortlessly estimate the time required to collect money from clients and customers. It is geared toward business owners and companies. Why do they need to know DSO? This effective metric can help them analyze their company’s effectiveness.
What can you learn from this article? We are going to cover the following topics:
- Usage of Days Sales Outstanding (DSO) in finance;
- Review of the Days Sales Outstanding Calculator;
- Days Sales Outstanding calculation, and
- DSO formula and its application in real life.
Furthermore, we will provide you with some examples of the DSO calculation that can come in handy when analyzing companies and their effectiveness. However, before we dive into calculations and examples, we will shed some light on Days Sales Outstanding to help you get a better understanding of what it is and how it’s used in finance. Without further ado, let’s dig into it.
Days Sales Outstanding (DSO) – What Is It?
Days sales outstanding, or DSO, is a measure of the number of days that a company has credit balances on their accounts receivable. Actually, it represents the total number of days in accounts receivable divided by the average daily sales for a company. This metric is used in the retail industry to measure the number of days it takes for a product to be sold. It tells how quickly companies can get their money collected from their customers. The DSO can be calculated for an entire business or individual products.
DSO is an important metric for companies to track because it can tell you how long your customers are taking to pay their bills. The higher the DSO, the longer your customers are taking to pay their bills and that means you have less cash on hand, and the more likely it is that a company will experience cash flow problems. This can be a problem if you need cash quickly (like when something goes wrong with inventory). On the other hand, the lower the DSO, the shorter amount of time is needed to sell inventory and generate revenue.
Why Is It Important to Calculate DSO?
Once you have understood what DSO stands for, you should know what it indicates and why companies need to calculate it. Basically, there are three main reasons to calculate DSO. Look at them below!
It can help in analyzing the operational effectiveness of a company
If you want to analyze the operational effectiveness of a company, one of the vital metrics is working capital. Compared to their rivals, businesses that have high DSO need more time to get money from consumers or clients. It usually means that they have a hard time collecting money, so they have to do something to address this problem.
High DSO is usually bad for medium and small companies
Even though working capital and accounts receivables constitute a small portion of what enterprises have on the balance sheet, these metrics can be very important to medium and small companies. That’s because they frequently rely on working capital when running daily operations. This is why a high DSO might be harmful to these companies and some of them go bankrupt as a result of this.
DSO can do a great job of identifying bad debts
In case the DSO of a company is significantly higher than what its peers have, then the accounts receivable should be regarded as bad debts. This means the company will have trouble collecting money owed by its clients. Bad debts should be addressed as soon as possible because they can heavily affect the future performance of the company.
DSO Formula: How to Calculate Days Sales Outstanding?
DSO = Average Accounts Receivables / Total Credit Sales * No. of days
This is the formula you need to use when calculating Days Sales Outstanding (DSO). In fact, our calculator is based on this DSO formula. To help you understand how it works in real life, we will take an example.
- Average Accounts Receivables: 20,000
- Total Credit Sales: 200,000
- Number of Days: 30
DSO = 20,000 / 200,000 * 30
DSO = 0.1 * 30
DSO = 3
Therefore, when calculating Days Sales Outstanding (DSO), you will have to take the following steps:
- Step 1: The first step involves calculating the average accounts receivables.
- Step 2: Now you should try determining the total credit sales of your company.
- Step 3: Determining the number of days in the accounting period of the company – If you want to calculate DSO for the fiscal year, then this would be 365 days. But if you want to calculate it on a monthly basis, then it would be 30 days.
- Step 4: Finally, you can compute DSO using the formula: DSO = average accounts receivable / total sales * days in the accounting period
FAQs
How Do You Lower DSO in Accounts Receivable?
It should be noted that neither the finance nor accounting department of your company has complete control over days sales outstanding. Remember that other company’s parts can also affect DSO. So if you want to lower it, you will have to focus your efforts on the cooperation of diverse departments in addition to finance executives of your company. Here are a few ways and tips on how to reduce DSO in accounts receivable.
- Focus on customer credits
- Gather information on the current status of DSO
- Get insight into invoicing processes
- Determine customer payment terms
- Be careful when managing accounts receivable
What Does DSO Indicate?
Days sales outstanding is a metric that indicates the number of days it will take to collect on an invoice. In other words, days sales outstanding is the number of days that a company owes to its suppliers for products that have been delivered.
Days sales outstanding is a metric used in financial accounting and management. It’s used as an indicator of how well a company pays its bills on time, which can be important for maintaining relationships with suppliers. It is calculated by dividing the number of accounts receivable by the average daily balance of accounts receivable.