DSO stands for Days Sales Outstanding, which is an accounting metric used by companies to estimate the size of their outstanding accounts receivable. It measures the average number of days it takes a company to collect payment for a sale. DSO is calculated by dividing the average accounts receivable during a given period by the total value of credit sales during the same period, and then multiplying the result by the number of days in the period.
A high DSO number suggests that a company is experiencing delays in receiving payments, which can result in a cash flow problem. On the other hand, a low DSO indicates that the company is getting its payments quickly, which can be beneficial for the business. Generally speaking, a DSO under 45 days is considered low.
DSO is an important metric for measuring a companys financial health. A low DSO means that the company is converting credit sales into cash quickly, which can improve cash flow and liquidity. A high DSO, on the other hand, means that it takes the company longer to convert credit sales into cash, which can slow cash flow and lead to cash flow problems.
DSO can also provide insights into the effectiveness of a companys accounts receivable and collection processes, as well as issues on the customer side of the equation. Some companies may attempt to focus more on the collection aspect of DSO equation by calculating days delinquent sales outstanding (DDSO) .
