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Days Sales Outstanding - Explained

What is Days Sales Outstanding?

Written by Jason Gordon

Updated at April 7th, 2022

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Table of Contents

What is Days Sales Outstanding?Calculating the Days Sales OutstandingHow is Days Sales Outstanding Used?Academic Research on Days Sales Outstanding

What is Days Sales Outstanding?

Days Sales Outstanding is the average collection period of a company. Days Sales Outstanding is also known as "days receivable", "average collection period", or "average debtor days". It is calculated to find out the average number of days a company takes to collect the dues owed by other individuals and companies. This ratio reflects the management of the company's accounts receivable. It is calculated on a monthly, quarterly or annual basis. It is a component of the cash conversion cycle.

Back to: Accounting & Taxation

Calculating the Days Sales Outstanding

The formula for calculating the Days Sales Outstanding is, 

DSO= (Accounts receivable/ Total Credit Sales) * Number of Days 

Or 

DSO= Accounts receivable/ (Total Credit Sales/ Number of Days).

How is Days Sales Outstanding Used?

Companies provide goods and services on a credit basis and later collect the payments for those. DSO is the average number of days it takes to make that collection. It is important for a company to collect the outstanding account receivables in a timely manner. According to the time value of money principle the more a company waits for receiving the moment the more they lose out on profit. As soon as the company collects the payment, they can roll the money and make a profit out of it. A high DSO value indicates the company takes a longer period to collect its account receivables whereas a low value shows it collects the account receivables quickly. Generally, DSO value under 45 is considered to be low, but that depends on the size and nature of the business. A small business may find it difficult to run the cash flow with a DSO value of 30, while for big businesses it is never an issue. It is important to maintain a standard DSO value according to the condition and nature of the business. A high DSO may result in a cash crunch while a very low DSO may affect the customer base. Companies with very low DSO often lose clients due to its strict account receivable collection policy. A well-maintained DSO ratio reflects the efficiency of the collection department. It is better to judge the efficiency of the company's cash flow management by considering the trend of the DSO. A trend reflects it much vividly than an individual DSO value.

Related Topics

  • Trend Analysis of Financial Statements
  • Common-Size Analysis (Vertical Analysis) of Financial Statements
  • Common-Size Financial Statement
  • Net Dollar Retention
  • Horizontal Analysis
  • Per Share Basis
  • Profitability Ratios
  • Gross Margin Ratio
  • Profit Margin
  • After Tax Profit Margin
  • Return on Assets
  • Total Shareholder Return
  • Cash on Cash Return
  • Earnings Per Share
  • Diluted Earnings Per Share
  • Asset Turnover Ratio
  • Berry Ratio
  • Break-Even Analysis
  • Liquidity Ratio
  • Current ratio  (Working Capital Ratio)
  • Working Ratio
  • Quick Ratio
  • Quick Assets
  • Days Sales Outstanding
  • Cash Ratio (Operating Cash Flow Ratio)
  • Receivables turnover ratio (often converted to average collection period)
  • Accounts Payable Turnover Ratio
  • Inventory turnover ratio (often converted to average sale period)
  • Solvency (Coverage Ratios)
  • Leverage Ratio (Debt Ratio)
  • Asset Coverage Ratio
  • Debt to Equity
  • Debt to Income Ratio
  • Debt Coverage Ratio
  • Times Interest Earned
  • Market Capitalization
  • Price to Equity Ratio
  • Book-To-Market Ratio
  • Price to Earnings Ratio
  • Price to Earnings Growth (PEG) Ratio
  • Price to Earnings Growth Payback Ratio
  • CAPE Ratio
  • Price to Cash Flow Ratio
  • Capital Maintenance
  • Book to Bill Ratio
  • Asset Turnover Ratio
  • Plowback Ratio 
  • Days Inventory Outstanding
  • Days Payable Outstanding
  • Days Sales Outstanding
  • Non-financial Performance Measures: The Balance Scorecard
days sales outstanding

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