# Days Sales Outstanding - Explained

What is 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.

## 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.

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