# Days Sales Outstanding DSO calculation and definition

E-commerce and retail companies typically have low Days Sales Outstanding, in the range of 7 to 30 days. As the name suggests, CEI measures how effective the collections team and their procedures are. Acknowledged as one of the best metrics to consider along with DSO, you can interpret the order-to-cash teams’ performance. For example, A/R is forecasted to be \$33mm in 2021, which was calculated by dividing 55 days by 365 days and multiplying the result by the \$220mm in revenue. During this waiting period, the company has yet to be paid in cash despite the revenue being recognized under accrual accounting.

Using the Accounts Receivable Days ratio of ~51.43 that we found earlier, we can then compare it to the 30-day company standard. Accounts receivable days refers to the length of time an invoice takes to clear all Accounts Receivable or how long it takes to receive the money for goods a company sells. This is useful for determining how efficient the company is at receiving whatever short-term payments it is owed. Credit sales, however, are rarely reported separate from gross sales on the income statement. The credit sales figure will most often have to be provided by the company. DSO is calculated by dividing the number of days in receivables by the total sales for the period.

## What is the Days Sales Outstanding Calculation?

However, you can avoid this and make your DSO better by offering discounts to customers who pay early. Account Receivable Turnover (ART) is a measure of how efficiently a company is collecting revenue on its outstanding invoices. It is calculated by dividing the total revenue by the average Accounts Receivable. A modern AR automation platform can be your business’ lifeline when it comes to staying on top of days sales outstanding and maintaining control of your cash position.

### What does DSO mean in KPI?

Days Sales Outstanding is the number of days it takes an organization to collect its accounts receivable from its customers. It is calculated by dividing the Accounts Receivable balance by the daily sales.

This is because the clients would now have an increased level of convenience to make their payments according to their preferences. Not to mention, offering the option for clients to complete their payments online would usually enable businesses to be paid faster in comparison to the offline methods of payment. Moving forward, the DSO is not very applicable if one were to compare firms that have substantial differences in terms of the proportion of sales completed via credit terms. This is due to companies with a low number of credit sales usually lacking meaningful data points regarding their DSO values and, thereby, operational cash flow performance. Thus, contrasting businesses with those that predominantly run on credit sales would bring limited actionable insights.

## Methods to Lower Days Sales Outstanding (DSO)

So, days sales outstanding is another liquidity metric used to determine how quickly a company can collect the receivables. Financial analysts need to understand the concept of DSO as it is a crucial part of the working capital assessment. This calculation yields the number of days it takes a company to collect its accounting and bookkeeping services receivables. A lower number indicates a company’s ability to collect receivables more quickly, while a higher number indicates a company’s inability to collect receivables as quickly. If customers have a history of paying severely late, it could be a sign that you should stop extending payment terms to them.

### How to calculate DSO for 6 months?

The DSO is calculated as follows: total open receivables last P1 months / P1) x 30 divided by total monthly sales last P2 months / P2.

A healthy or concerning DSO ratio would largely depend on the nature of the business and the industry verticals in which the firm is operating. In other words, the DSO value should not be the sole factor to be considered but rather a complementing element to be viewed alongside other working capital metrics. Due to the importance of having a healthy operational cash flow when running a company, it would be in the firm’s best interest to ensure that it collects all outstanding accounts receivables as soon as possible.

## The Most Accurate Formula to Calculate your DSO

In a nutshell, the days sales outstanding (DSO) ratio is an essential metric that B2B-centric companies need to track in order to assess the financial health of their businesses consistently. The lower the DSO value, this implies that the firm takes a shorter duration to convert their credit sales into capital, thereby suggesting a healthier cash flow. Conversely, the larger the DSO ratio, the greater the period taken by the client to settle its outstanding accounts receivables, thus shedding light on a possibly tighter operational cash flow for the company. As a result, the firm would be able to devise the relevant strategies to lower the DSO value. Days sales outstanding (DSO) is a financial metric that measures the average number of days it takes a company to collect payment after making a sale.

Interestingly, a report on the technology company Apple recently stated that Apple gets paid for its products before it actually has to pay for them. Overall, it’s important to use DSO as just one tool in the decision-making process, and to consider it in the context of other financial metrics and factors that may be impacting it. Divide the total for each bucket by the total amount outstanding and then

multiply that number by 100. GCR ultimately measures how well your practice has

negotiated their fee schedules overall.

## Days Sales Outstanding – Calculation for a Specific Period

Looking at a DSO value for a company for a single period can provide a good benchmark for quickly assessing a company’s cash flow. The following video provides a good explanation of days sales in receivables or days sales outstanding. When compared, it reveals that Company ABC is giving their clients nearly double their standard invoice time. Company ABC currently has \$100 in its accounts receivable, and its revenue is \$700. We can then use the Accounts Receivable Days formula to calculate the effectiveness of Company ABC’s accounts receivable process.

### How to Lower Days Sales Outstanding and Enrich Cash Flow – G2

How to Lower Days Sales Outstanding and Enrich Cash Flow.

Posted: Fri, 12 May 2023 07:00:00 GMT [source]

Due to industry-wide audits and takebacks, patient

payments are essentially mandatory to achieve financial success. Net Collection rate (NCR) measures how much you

collected of the total amount you are contractually/legally ALLOWED to collect. • Charges billed by date billed and date of service will be key as well as

payments reports for getting totals and date range information. Accountancy firms need to act quickly to ensure that they offer their clients a range of advisory services, move with new trends, and increase revenue sources.

### How do you calculate DSO days in Excel?

1. DSO = \$170 million / \$500 million * 365.
2. DSO = 124 days.