What is Days Sales Outstanding (DSO)?
How Does Days Sales Outstanding (DSO) Work?
The formula for daily sales oustanding is:
If a company does not sell on credit (that is, the customer must pay immediately), then total sales is used in the denominator.
For example, let's assume Company XYZ is a department store. If, in 2010, it made $10,000 of its $15,000 in sales on credit, and the 2010 annual report included a balance sheet listing $7,000 of receivables, then using the formula above, we can calculate Company XYZ's DSO:
= $7,000 / ($10,000/360) = 252 days
This means that it took an average of 252 days to collect money on its credit sales in 2010.
Why Does Days Sales Outstanding (DSO) Matter?
Days sales outstanding (DSO) is important because the speed at which a company collects cash is important to its efficiency and overall profitability. The faster a company collects cash, the faster it can reinvest that cash to make more sales.
Comparing analysts a good idea of which companies manage credit well and use receivables efficiently to grow their businesses. A relatively low indicates that a company collects its receivables quickly, and a high indicates the opposite. Similarly, a company with an increasing DSO over time could be becoming less efficient, while a company with a decreasing DSO over time could be becoming more efficient.among companies can often give
However, changing seasonality in sales can distort . For this reason, some analysts use a daily average of sales based not on the whole year but on 30 to 90 days of sales and use an average receivable number. This does not eliminate the problem of seasonal shifts, but it does mitigate it somewhat.
Regardless, comparison ofis generally most meaningful among companies within the same industry, and the definition of a 'high' or 'low' ratio should be made within this context.