Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) measures the average number of days it takes a company to collect payment of invoices. Tracking DSO helps a company determine their collection effectiveness and may indicate whether current credit policies and procedures require modification. In the current economy and shifting industry conditions, it is particularly important to monitor collection effectiveness and bad debt write-offs.
DSO Calculation:
Accounts Receivable Total/Sales per Day
Example:
150,000 Accounts Receivable/,257,000 Annual Sales/360 days per year
OR
150,000/3,492 = 43 days
There are a number of ways to calculate DSO sales per day:
� Annually (annual sales total/360 days)
� Monthly (monthly sales total/30 days)
� Quarterly (quarterly sales total/90)
Because atypical sales numbers impact DSO, a three month rolling average may be used to minimize distortions (previous 3 month sales/90).
Terms of sales and credit policy both impact DSO. The closer the DSO is to your terms of sale, the more effective your collection efforts.
When DSO is reduced, more internal operational cash is available to fund company operations and reduce interest expense. How does your DSO compare to other companies in your
industry? Industry specific data by *SIC/NAICS Code are available from Annual Statement Studies http://www.rmahq.org and Credit Research Foundation http://www.crfonline.org
*SIC = OSHA’s Specific Industry Classification system
NAICS= North American Industry Classification System
Other Credit Function Measurements:
Best Possible DSO
Average Days Delinquent
Collection Effectiveness Index
Percent Current
Percent AR Greater Than 60 Days
Percent AR Greater Than 180 Days
Gross Bad Debt as % of Sales