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DSO stands for Days Sales Outstanding

It is a commonly used measure for the invoicing collection process. Investopedia defines DSO as “A measure of the average number of days that a company takes to collect revenue after a sale has been made”. If you are strictly a cash business your DSO will be 0. If you generate invoices for your customers and give them credit terms (some number of days before they are supposed to pay) then you will will have an accounts receivable balance and thus a DSO . You can use the DSO number to measure the efficiency of your collections. Since DSO is so popular you can also use it as a gauge against other companies in your industry.

Calculating your Days Sales Outstanding

The calculation is as follows.

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Example

Here is a very simple example of how to calculate DSO.

A company had sales of $1100 in June. The company got cash for $100 and generated invoices with Net 30 day terms (customer has 30 days to pay) for the other $1000. The total Credit/Invoice Sales for June will be $1000 (not $1100 since they got cash for $100). At the end of June the company had $200 in open invoices remaining from May that are still not paid. So adding this $200 to the $1000 worth of invoices generated in June, their accounts receivable at the end of June would be $1200. The DSO for the month of June would be $1200/$1000 X 30 (# of days in June) = 36.
A 36 day average to get paid is not to bad. Generally speaking, if your DSO is under 40 (assuming Net 30 day credit terms) you are fairly efficient at collecting your money.

DSO measures efficiency not effectiveness.

In a future article we will show you the problems with DSO. Your goal is to get paid faster and there are other performance indicators that can be used, along with DSO, to get a clearer picture of your collections effectiveness.

Check out this next post in this to get a couple of alternative ways to measure your effectiveness

One Response to “The DSO Calculation (Days Sales Outstanding)”

  1. kroberts says:

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