The sales figure of the company is technically the revenue of the company. The easiest way of finding this value is to read dso meaning the company’s annual report. The sales figure of a company will always be reported in the company’s income statement.
- For example, companies may be able to reduce DSO by, say, 20 days by significantly tightening customer credit approvals, but that will not be worth much if customer acquisition and retention suffers as a result.
- DSO calculates the average number of days that a company takes to collect a payment of credit sale.
- DSO is only one of the several accounts receivable key performance indicators (KPIs) that you can use to track the health and operation of your business.
- Analyzing changes in DSO allows companies to assess customer credit risk more effectively.
- It is also possible to relate the DSO value to another time period, for example to 90 days.
Days sales outstanding tends to increase as a company becomes less risk averse. Higher days sales outstanding can also be an indication of inadequate analysis of applicants for open account credit terms. 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. In accountancy, days sales outstanding (also called DSO and days receivables) is a calculation used by a company to estimate the size of their outstanding accounts receivable.
Days Sales Outstanding (DSO): Meaning and Impact on Cash Flow
A business with high DSO often fails to convert orders to cash, and in some cases, it writes off the payment as a bad debt. To sum everything up, if you’ve made a sale, but you haven’t collected the payment on time, it’s counted as a loss for your business. With DSO, you can measure the efficiency of your collection process and come up with practices to get paid quicker. Getting paid quicker means more funds to reinvest for your business operations. With the right tools at hand, you can master your accounts receivable process and stay on top of your cash flow.
Think of it as having cash readily available to handle daily needs and seize opportunities. Understanding the meaning of DSO is crucial because it goes beyond being a numerical value. It reflects customer buying and payment behavior and shows the effectiveness of your credit and collection policies.
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Given the vital importance of cash flow in running a business, it is in a company’s best interest to collect its outstanding accounts receivables as quickly as possible. Companies can expect, with relative certainty, that they will be paid their outstanding receivables. But because of the time value of money principle, time spent waiting to be paid is money lost.