{"id":13473,"date":"2023-01-11T15:38:00","date_gmt":"2023-01-11T15:38:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=13473"},"modified":"2023-01-25T10:41:17","modified_gmt":"2023-01-25T10:41:17","slug":"days-of-sales-outstanding","status":"publish","type":"post","link":"https:\/\/businessyield.com\/finance-accounting\/days-of-sales-outstanding\/","title":{"rendered":"DAYS OF SALES OUTSTANDING- Everything You Need To Know","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

Many business analysts point out that poor cash management is the leading cause of business bankruptcy. If your company’s cash flow needs some attention, don’t panic! Analyzing a few simple financial metrics<\/a> can make a big difference. One of the most important is the days of sales outstanding (DSO) ratio. This post will explain what this formula is, how to do a DSO calculation, and how you can improve your DSO. Ready to learn more.<\/p>

What is Days of Sales Outstanding – DSO?<\/h2>

Days of Sales Outstanding (DSO) is a measure of the average number of days it takes for a business to collect payment after a sale. Often determined monthly, quarterly, or annually, the DSO can be calculated by dividing the number of accounts receivable during a given period by the total value of loan sales in the same period and multiplying the result by the number of days in the period measured.<\/p>

How to use Days of Sales Outstanding (DSO)<\/h2>

An effective way to use days of sales outstanding measurement is to track a trend line month after month. This shows any change in the company’s ability to charge its customers. If a company is very seasonal, a variation is to compare the measurement with the same metric for the same month of the previous year. This provides a more reasonable basis for comparison.<\/p>

Regardless of how this measure is used, keep in mind that it is typically made up of a large number of outstanding invoices and therefore does not provide information on the ability to collect a particular invoice. Therefore, it should be supplemented by a continuous review of the outdated claims report and collection letters from the collection staff.<\/p>

DSO can be a useful measure for an acquirer. You can search for companies with abnormally high DSO numbers to acquire the companies and then improve your loan<\/a> and collections operations. In this way, they can withdraw part of the working capital of the acquired companies, which reduces the amount of the initial acquisition costs.<\/p>

Days Sales Outstanding Calculation<\/h2>

Income is created each time you make a sale. However, this often just means that an invoice has been created. It doesn’t count as cash until you see the money in your bank account. This means you have to focus on collecting that cash. Too often, businesses work to increase their sales regardless of their actual cash position, and this can be a disaster for a small business owner<\/a>.<\/p>

With that in mind, let’s first look at some key terms:<\/p>

Cash sale:<\/strong><\/p>

A sale that takes place immediately. Payment can be made by card or other forms such as cash, check or electronic check. The defining characteristic is the time of payment, at the time of sale.<\/p>

Sale of loan:<\/strong><\/p>

A sale that will be completed at a later date. Payment can also be made in cash and viewed as a loan sale. The defining characteristic is the timing of payment in the future after the services have been provided.<\/p>

Accounts receivable (A\/R):<\/strong><\/p>

The billing term for all outstanding invoices due to your company on a certain date. If you use an accountant for your business, you can provide this information. If not, you can find it yourself by looking at your balance sheet and income statement.<\/p>

Your days of sales outstanding quota shows the average number of days it will take you to collect the sales on your loan. Using this relationship can streamline the accounts receivable process and increase your profitability by adding predictability to your business. DSOs are often billed monthly, quarterly, or annually.<\/p>

For your DSO calculation you need:<\/p>