Accounts receivable can be found on the balance sheet, and net credit sales can be calculated using the income statement. The result indicates the average number of days a business takes to collect money from its customers. A high DSO results in less money for management to spend on business operations because they are not collecting payments from their customers on time. As a result, management may need to make changes to the accounts receivable department to increase efficiency. Days sales outstanding is closely related to accounts receivable turnover, as DSO can also be expressed as the number of days in a period divided by the accounts receivable turnover.

Throughout the projection period, revenue is expected to grow 10.0% each year. In our hypothetical scenario, we have a company with revenues of $200mm in 2020. Thus, it is critical to not only diligence industry peers (and the nature of the product/service sold) but the customer-buyer relationship.

What Would Be Considered a Good Days Sales Outstanding Ratio?

Let’s say company A has a sales forecast of around $20,000 in 30 days, and DSO is 20. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you’re using the wrong credit or debit card, it could be costing you serious https://www.bookstime.com/articles/days-sales-outstanding money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee. Learn how to calculate the DSO for your business and what the results of that calculation mean.

Your average accounts receivable balance divided by revenue for the given period, all multiplied by number of days in the period. Monitoring DSO is crucial for the financial health of B2B SaaS startups. The more proactive you are in measuring days to collect, the easier it will be to spot cash flow problems early and address them before they start to impact your operational efficiency. It suggests how efficient the company’s collections department is, and the degree to which the company is maintaining customer satisfaction. In effect, determining the average length of time that a company’s outstanding balances are carried in receivables can reveal a great deal about the nature of the company’s cash flow. This means company A has recovered its dues in 26.6 days and that its DSO is 26.6 days.

How do I calculate DSO in Excel?

This days sales outstanding formula is more complex but more accurate too. That’s why most CFOs and finance professionals use this method to calculate their company’s DSO and that’s why you should use it too. Days sales outstanding is an element of the cash conversion cycle and may also be referred to as days receivables or average collection period. This metric defines the best possible number of days it takes for a business to collect its receivables.

Hence, it is necessary to view the DSO value based on the case-specific context. If you work on net-60 payment terms, you might be happy with this performance. But if you expect to be paid in 30 days or less, and it’s actually taking an average of 55, this is something you’ll want to dig into. Days Sales Outstanding (DSO) is a metric used to gauge how effective a company is at collecting cash from customers that paid on credit. In manufacturing industries, where customers are often given longer payment terms, the DSO value can be 60 days or higher.

How To Calculate Days Sales Outstanding (aka DSO Calculation)

DSO can be calculated by dividing the total accounts receivable during a certain time frame by the total net credit sales. This number is then multiplied by the number of days in the period of time. This formula for calculating DSO is limited to credit sales, and cash sales transactions are usually kept out of it. All you https://www.bookstime.com/ have to do is divide your final accounts receivable by the total credit sales for the period (monthly/quarterly/annually) and multiply it by the number of days in the time period. Businesses may extend credit to customers, allowing them to purchase a product today and pay for it within an agreed-upon time in the future.

It means your company is able to collect payments from customers quickly after making sales. This can lead to improved cash flow and financial stability, allowing the business to reinvest in growth initiatives or cover operational expenses with ease. It can also indicate a strong handoff from sales teams to customer success as well as strong alignment between you and your customers on pricing and payment processes.

Maintaining Records of the Clients’ Payment Details

Indeed, it is based on the average number of days it takes you to get paid over a given time frame. To calculate it, you need to divide your Accounts Receivable at the end of the period by your gross sales over the same period of time. A sharp increase in DSO can cause a company serious cash flow problems. If a company’s ability to make its own payments in a timely fashion is disrupted, it may be forced to make drastic changes. 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.

Keep monitoring it on a semi-regular basis to make sure that your business remains in good financial health. It takes Apple Ice cream company an average of 22.5 days to receive payment. It is usually calculated monthly, quarterly or yearly and provides a company with its financial state over a study of DSO trends.

How to Calculate Days Sales Outstanding (Step-by-Step)

Needless to say, a small business can use its days sales outstanding number to identify and flag customers that are weighing it down by not paying promptly. The formula above shows us the accounts receivable turnover ratio is inversely proportional to DSO. For example, a DSO of 30 means that, on average, it takes the company 60 days to collect payments from customers. The company is not doing a good job collecting money on time from its customer. The average amount of time it takes to collect money is about 37 days over the payment terms.

Companies need to track DSO overtime to catch any issues that might arise. For example, a DSO increasing over time might indicate poor customer satisfaction, resulting in their hesitation to pay. Additionally, salespeople may be extending payment terms to increase sales, which may or may not be a bad thing. Everything is highly dependent on the company itself, its past record of DSO, and its industry.

Examples of DSO

An increase in DSO can result in cash flow problems, and may result in a decision to increase the creditor company’s bad debt reserve. Having a DSO greater than the standard payment terms indicates the company is not collecting money from its customers on time. Because of this, management will have less money available to spend on operating activities. In order to decrease the DSO, changes will need to be made to the accounts receivable department to increase efficiency. A high DSO means just the opposite – with a long waiting period before converting credit sales to cash, it is more difficult for the company to cover expenses and have extra capital for business investments.

Each of these tactics hinges on your ability to cut down on the amount of time spent simply calculating DSO. This is a deceptively complex metric, giving you a prime opportunity to leverage automation to drive efficiency. Now, we can project A/R for the forecast period, which we’ll accomplish by dividing the carried-forward DSO assumption (55 days) by 365 days and then multiply it by the revenue for each future period.