Days Sales Outstanding (DSO)

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What is Days Sales Outstanding (DSO)? Meaning.

Days Sales Outstanding (DSO) is a financial performance ratio, which indicates how long it takes a company to collect accounts receivable after a sale has been made and is therefore an important tool to measure liquidity.

Although the average DSO varies from one industry and region to another, a low DSO number indicates that a company collects its outstanding receivables quickly, whereas a high DSO number shows that a company is selling its products and services to customers on credit and requires more time to collect the money, which might be an indication of poor credit management and could ultimately lead to cash flow problems.

Calculation of Days Sales Outstanding. Formula

The DSO ratio is calculated as follows:

DSO = (Accounts Receivable / Total Credit Sales in Accounting Period) x Days in Accounting Period

In this formula, the days in accounting period are typically 90 days for quarterly statements or 365 days for yearly statements.

DSO forms one part of the Cash Conversion Cycle, which represents the length of time that it takes a company to convert resource inputs into cash flows.

Days Sales Outstanding (DSO) is also known as Days Receivables.

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