Days Sales Outstanding, or DSO, is an extremely common calculation to use as a benchmark of performance in the accounts receivable department. Usually, a controller or CFO will look at this number as a way to gauge how well the accounts receivable department is doing their job, as this calculation will tell you how effective a company is at collection on open lines of credit. Usually the DSO calculation is applied to all outstanding invoices.The calculation can be used in many different ways than the standard, however. If you are lending credit to a customer and you are having issues with them paying, you can apply the DSO calculation at the customer level to get an idea of their cash flow troubles. The calculation can also be used to monitor internal amounts of cash invested in accounts receivable.
Days Sales Outstanding is calculated using the following formula:
(Accounts Receivable/Annual revenue) X Number of Days in the Year.
This calculation still has its flaws, though, and should not be seen as a “be-all, end-all” for the accounts receivable department.
Stay tuned for more blog posts in this series on calculating DSO to find out where DSO has it’s problems and what other calculations you should use in conjunction.
Should DSO be the only calculation you use?
Read our guide here.