Days Sales Outstanding

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In accountancy, Days Sales Outstanding is a company's average collection period. A low figure indicates that the company collects its outstanding receivables quickly. Typically it is looked at either quarterly or yearly (90 or 365 days).Days Sales Outstanding (DSO) figure is an index of the relationship between outstanding receivables and sales achieved over a given period. The DSO analysis provides general information about the number of days (DSO days) a customer takes to pay an invoice.

It's considered a leading indicator of impending trouble at a company particularly with product support and customer service. It tends to increase as a company loses control over quality of its CRM and can indicate revenue problems or future changes in warranty reserve.

Days Sales Outstanding, or DSO, is calculated as: Total Outstanding Receivables at the end of the period analyzed divided by Total Sales for the period analyzed (typically 90 or 365 days), times the number of days in the period analyzed. That is,

DSO = (Receivables/Sales)*Days. (can use average receivables as a more conservative estimate)

DSO can vary over the course of a year with a company's seasonal business cycle. Of interest when analyzing the performance of a company is the trend in DSO. If DSO is getting longer, customers are taking longer to pay their bills, which may be a warning that customers are dissatisfied with the company's product or service, or that salespeople are making sales to customers that are less credit-worthy, or that salespeople have to offer longer payment terms in order to seal the deal. It could also mean that the company has an inefficient or overtaxed accounts receivables department.

However, DSO is not the most accurate indication of the efficiency of accounts receivable department as the sales volume is influencing the outcome of the formula. For example, given that the overdue balance stays the same but an increase of sales in the past 90 days can result in a lower DSO, vice versa. A better way to indicate the performance of accounts receivable department is by looking at the total overdue balance in proportion of the total accounts receivable balance (total AR = Current + Overdue).