Days Sales Outstanding

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​  Days sales outstanding or DSO as it is often called, is a ratio that measures the average number of days a company takes to collect its accounts receivable. When a company's DSO is short, it tells us that the company is faster at collecting payments from customers.  ​This also means you are able to use the cash from sales sooner.

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When combined with days payable outstanding and days inventory outstanding, DSO is a component of the cash conversion cycle.

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Example:
If a company has credit sales of $1.5 million over the course of a year and an accounts receivable balance of $150,000, we would calculate the DSO by:

1. First multiplying our accounts receivable of $150,000 by the number of days in our period, which in this case is one year or 365 days. 
2. Next, we divide this answer by the total sales due to be paid on a future date.  Which are known as credit sales.  In our case we divide 54,750,000 by $1,500,000. 
3. This would give us a DSO of 36.5 days.

What does the Output tell Us?

• To start you should know that a high DSO can be dangerous.  It indicates a company is selling lots of products on credit and is taking a longer than normal time to collect payments for the sales from customers. This will eventually result in cash flow difficulties.  On the other hand a low DSO tells us that the company is collecting payment from its customers quite rapidly.  And, as we all know, getting paid quickly is important.  Be aware that DSO can vary quite a bit in different industries.

 How can we improve DSO?

• DSO is unique in the sense that you have so much information that can be improved.  With that said, mapping your receivable or collection process out and removing waste can improve both the information side of the value stream and the material side of the value stream. 
• Another way to improve your DSO is by automating parts of the collection process.  For example, electronic invoicing is much quicker than mailing and faxing.  Also, many systems will now automatically guide quotes to PO’s and PO’s right into invoices.  This makes the information side of the process much more efficient. 
• Another very common way that companies can improve DSO is by giving your customers incentives to pay early.  For example, a 2/10 net 30, means that the buyer receives a 2% discount if they pay the invoice within 10 days instead of within 30 days. 

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