It is important for businesses to accurately calculate their daily sales outstanding (DSO). DSO is a business metric that measures how well a company can collect its outstanding receivables from customers. Keeping track of this metric is critical to success, as it helps businesses understand their cash flow and determine the overall financial health of the company. In this blog post, we will discuss how to calculate DSO and the different methods and tools available for doing so. We will also discuss the benefits of calculating DSO and the implications of having a high or low DSO ratio. Finally, we will provide some tips and best practices that businesses can use when calculating and monitoring their DSO. So, if you’re looking to gain a better understanding of daily sales outstanding, keep reading to learn more.
Why is daily sales outstanding important?
Daily sales outstanding is crucial because it can show whether a company has the financial resources it needs. Businesses with more financial freedom may have more opportunities for growth, product variety, and marketing A problem in the collection department may be indicated by a consistently rising DSO average. Tracking DSO may also help with invoice payments. Paying bills or handling payroll during periods of high cash flow may help a company’s financial stability. Owners of businesses who are aware of the state of their DSO may alter the norm by urging clients to pay quickly, such as with checks or cash.
What is daily sales outstanding?
The average number of days before a business receives payment for a sale, or accounts receivables, is known as daily sales outstanding (DSO). Customers who pay using credit cards usually create outstanding payments. Once a month or once a year, business owners or bookkeepers can determine DSO. It’s important to collect any unpaid accounts receivable as soon as possible during a month because cash flow helps a business maintain overhead and other costs. Furthermore, due to rising interest rates, current assets are typically worth more than future assets.
If customers frequently pay with cash, the business can quickly use the money again. DSO rates vary depending on the industry. For instance, lengthy payment terms are typical in the financial sector. Quick payment may be crucial for each quarter in other industries, such as retail or agriculture, due to stock variations and reorder rates. Smaller companies typically place more emphasis on maintaining a constant cash flow.
Differences between high and low DSO
High DSO figures demonstrate to business owners that credit sales outpace all other payment types. Low DSO numbers demonstrate that a business collects receivables in fewer days. Companies with lower month-to-month DSO averages might have more capital available for growth or other business initiatives.
Think about how the DSO formula only takes credit sales into account. Cash sales have a DSO of zero, but most business owners don’t factor these sales into DSO. Companies with high cash sales would have lower DSOs than companies with high credit sales if bookkeepers took cash into account when calculating DSO. A DSO average under 45 is typically considered low, and anything over 50 days is considered high.
How to calculate daily sales outstanding
Consider the following steps to determine your company’s daily outstanding sales:
1. Determine the DSO period
Decide which period to use in your formula before calculating your company’s DSO. Knowing your DSO for a year or more may provide more comprehensive data about your sales. However, keeping track of your DSO each month can help you identify any changes in DSO rates. Finding out your DSO average over a period of months can help you understand the type of cash flow you have.
2. Gather necessary formula information
Find your credit sales and accounts receivable values for the business period in order to calculate DSO. Add the value of the accounts receivable on the first and last days of the business period to determine your average amount owed. Locate your total sales for the period and take out any cash or check sales, returns, and adjustments to arrive at your total credit sales.
3. Calculate your businesss DSO
Utilize the number of days in the period to determine your company’s DSO. In a leap year, remember to add a day when calculating for a year. The DSO formula is as follows:
Accounts receivable / credit sales x calculation days = DSO
4. Respond to DSO patterns
Your monthly or yearly DSO can be calculated, and the results can be used to better understand your business. Your DSO may be a sign of improved cash flow if it is low or steadily declining. Your DSO may indicate a potential problem with payment collection if it increases consistently.
Encourage customers to use quick payment options like cash or checks to help reduce DSO averages. Customers may think about using alternative payment methods if they receive incentives like discounts, in-store points, or free goods. Offering a variety of payment options is another way to raise your DSO rates. Accepting payments through eChecks or other mobile payment options can increase customer satisfaction and your cash flow.
Examples of calculating daily sales outstanding
Take into account a few of the examples below to help you comprehend calculating DSO:
Example 1
A restaurant named Georges Gumbo generated credit sales of $600,000 in June. During that month, the restaurant made $300,000 in accounts receivable. Given that June has 30 days, the DSO for Georges Gumbo is:
$300,000 / $600,000 x 30 = 15
The DSO for George’s Gumbo is 15 days for a month.
Example 2
The Fiona’s Fashion Emporium proprietor determines the DSO for three months. The company made a credit of about $150,000 and has $100,000 in accounts receivable. Using 92 days, the DSO formula calculates as:
$100,000 / 150,000 x 92 = 61
The DSO for Fionas Fashion Emporium is 61 days for a period of three months.
Example 3
Dirk Brothers Automotive calculates its DSO for the entire year. The company generated credit sales of $2 million and has $1 5 million in accounts receivable. The following is the result of applying the formula to a time period of 365 days:
$1,500,000 / $2,000,000 x 365 = 273
For the entire year, Dirk Brothers Automotive’s DSO is 273 days.
How to Calculate Days Sales Outstanding
FAQ
What is meant by days sales outstanding?
- CCC is equal to the sum of the days’ outstanding sales plus the days’ inventory less the days’ unpaid invoices.
- CCC = DSO + DIO – DPO.
- DSO is calculated as [(BegAR EndAR)/2] / (Revenue / 365)
- Days of Inventory Outstanding.
- DIO is calculated as [(BegInv EndInv / 2)] / (COGS / 365).
- Operating Cycle = DSO + DIO.
