Similarly, comparing such a company with one that has a high proportion of credit sales is not meaningful. The DSO of the latter may appear high, but this does not necessarily indicate poor cash flow. But your ideal days-sales-outstanding ratio depends on your industry and type of business. According to the Credit Research Foundation, the average days sales outstanding for the first quarter of 2024 for domestic trade receivables was 35 days. Your accounts receivable (A/R) is all outstanding payments owed to your company, and can be found by reviewing your balance sheet and income statement. With all the information gathered, you’re now ready to calculate days sales outstanding using the DSO formula.
- But, depending on the type of business and the financial structure it maintains, a company with a large capitalization may not view a DSO of 60 as a serious issue.
- However, you can avoid this and make your DSO better by offering discounts to customers who pay early.
- While DSO can prove extremely useful in monitoring cash flow and A/R performance, it only provides a limited snapshot of your operations.
- But it’s one thing to know there are issues, and quite another to pinpoint where and why they occur or prioritize how they’re addressed.
- Having identified potential opportunities for improvement, process mining enables you to dig into the underlying cause of the issues.
Review your books and adjust payment terms for clients who pay late consistently
It’s often easier to decide to adjust payment terms based on a client’s credit history before completing any work than it is to deal with collecting from a late-paying client after you’ve delivered the work. A client’s credit history may give you insight on how to adjust your payment terms and credit policies when working with them. Automating the accounts receivable process is simple when you use accounting software that integrates with your payment system and business bank account. Including information on your invoices like due days, payment terms and options can help keep you and your customers on the same page.
Example of a DSO calculation
Clear communication helps maintain healthy relationships while keeping them informed about their financial obligations towards your business. This is largely because you’re not dealing with cash sales the way you would in consumer packaged goods or retail. Get a better understanding of when you experience higher DSO trends so you can resolve issues alongside dso meaning your partners in accounting and customer success. When overdue accounts go past 120 days, the lesser your chances of collecting. You may also lose out on an opportunity to expand or otherwise enhance your business because you won’t have the cash to invest. You should strive for a balanced DSO that supports cash flow without sacrificing customer satisfaction.
How to Calculate Days Sales Outstanding and Why It Matters
With DSO, you can measure the efficiency of your collection process and come up with practices to get paid quicker. Getting paid quicker means more funds to reinvest for your business operations. With the right tools at hand, you can master your accounts receivable process and stay on top of your cash flow. This formula for calculating DSO is limited to credit sales, and cash sales transactions are usually kept out of it. All you have to do is divide your final accounts receivable by the total credit sales for the period (monthly/quarterly/annually) and multiply it by the number of days in the time period. DSO refers to the average number of days businesses take to collect payments for the goods and services they sell to customers on credit.
For example, the average DSO for discount stores, like Dollar General, Burlington Stores, etc., is approximately 4 days. On the other hand, the same value is unexpectedly low for the oil and gas sector as its normal DSO ranges between 50 and 130 days. Chaser’s outsourced credit control services are significantly more cost-effective than in-house teams while offering a flexible and proactive https://www.bookstime.com/ service. If you know how much money you’re likely to have coming in each month, it makes it a lot easier to manage your outgoings and make sure you don’t run into any cash flow problems. The accounting period of a company is essentially its fiscal year, which more often than not has 365 days. Hence, we can safely assume that days in the company’s accounting period is 365 days.
You should calculate days sales outstanding to get deeper insight into opportunities to improve your company’s cash flow. Your DSO ratio tells you how efficiently you’re collecting cash from customers, so the more granular you can get with your calculations, the easier it will be to identify opportunities for improvement. There is no definitive answer to this question, as it varies from industry to industry.However, as a general rule of thumb, a DSO of 45 days or less is considered to be good.
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- Also, cash sales are not included in the computation because they are considered a zero DSO – representing no time waiting from the sale date to receipt of cash.
- Learn how to calculate the DSO for your business and what the results of that calculation mean.
- This Days Sales Outstanding benchmark will allow you to see where you stand in comparison with your competitors.
- However, a high DSO for one could be a low DSO for the other sector and vice-versa.
Much as the name suggests, the best possible DSO for a given timeframe captures the optimal DSO score your business could have received if everything ran perfectly. And by comparing your current performance against your potential, you can more easily identify efficiency challenges. An increase in sales can artificially lower the DSO value, giving a misleading impression of improved efficiency. Conversely, a decrease in sales can raise the DSO, suggesting inefficiency where there may be none. There are many terms you can offer to clients, and if you find certain customers are consistently behind on payments, it may help to shorten your payment terms. Research industry standards and benchmarks for DSO to see how your company compares to peers.
- January has 31 days, so 31 will be the number of days we use in the DSO formula.
- Given that John was targeting a 30-day collection period, his DSO of 31 days is good for his business.
- A measurement of how well a business collects outstanding (unpaid) customer invoices.
- Offering your customers a variety of payment options, like card payments and bank transfers will get you paid quicker, since your customers can opt for the most convenient payment option.
- Suppose a company accounts receivable (A/R) balance of $30k and $200k in revenue.
- A low DSO means quicker payment collections, ensuring a steady cash flow, essential for operational stability and growth opportunities.
These insights can help inform strategies for improving your accounts receivable management. Let’s use an example of a business that has $10,000 in accounts receivable on January 1, 2024. The following month, on February 1, 2024, the business has $12,000 in accounts receivable. The business also sells $8,000 in credit sales between January 1 and February 1. Finally, tracking your DSO over time allows you to view trends, be on the alert if the DSO rises, and make any adjustments to your accounts receivable process. It’s up to you to determine the period you want to cover when calculating DSO.
Tracking DSO is important because it’s a good indicator of a company’s financial health and helps you understand the company’s cash flow. On the other hand, a low DSO means the company is collecting payments quickly, which is a good sign of financial health. DSO can also be a good indicator of how well a company is doing at extending credit to customers. Days sales outstanding or DSO is a crucial business metric and a KPI all accounts receivable teams should be tracking. It’s a measure of the average time (in days) companies take to collect payment for goods and services bought on credit over a given period.
