It also indicates that the business has an efficient collections process and a proactive collections team. And that is what leads to a lower DSO and helps a business recover past dues seamlessly. When a business has a low DSO, it also guarantees inflow of operational liquidity that can be used for other high-value functions. Since days sales outstanding represents how long it takes to collect accounts receivable payments due from customers, the lower the figure, the better.

Without sufficient funds to fuel day-to-day operations, companies are at risk of collapse. Companies often misinterpret DSO, leading to inaccurate performance measurement. For medium-sized companies seeking to make the right decisions for business growth, precise DSO interpretation is essential. It’s easier to evaluate financial health after weighing all these factors together. The electronics, machinery, and construction sectors continued to suffer from the longest DSO with 89 days, 86 days and 82 days, respectively, on a yearly average, well above the global average of 65 days.

Accounts Payable

If the number is climbing, there may be something wrong in the collections department, or the company may be selling to customers with less than optimal credit. DSO is not particularly useful in comparing companies with significant differences in the proportion of sales that are made on credit. The DSO of a company with a low proportion of credit sales does not indicate much about that company’s cash flow. Comparing such companies with those that have a high proportion of credit sales also says little. 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.

• It’s important to note that we consider only credit sales while calculating the DSO.
• Suppose we’re tasked with forecasting the accounts receivable (A/R) balance of a hypothetical company that reported revenue of $200mm in 2020.
• If the number is climbing, there may be something wrong in the collections department, or the company may be selling to customers with less than optimal credit.
• This data-driven early warning system provides timely, actionable insight from which to review Accounts Receivable strategies.
• A good or bad DSO ratio may vary according to the type of business and industry that the company operates in.

Also, to improve DSO, start leveraging the right tools – with the right tool, you can optimize the credit and collections process, thereby improving the DSO. It’s important to note that we consider only credit sales while calculating the DSO. Cash sales are said to have a DSO of 0 because they don’t affect the account receivables or the time taken to recover the dues. Cash is undeniably the lifeblood of any business and maintaining a healthy cash flow is the key to keep a business thriving.

DSO = (Average Accounts Receivable / Total Credit Sales) * Number of Days

In manufacturing industries, where customers are often given longer payment terms, the DSO value can be 60 days or even higher. The Days Sales Outstanding value indicates the length of time customers pay their bill on average. For companies, this value is of great importance because it has a direct influence on liquidity. Read here how to calculate, interpret and improve the Days Sales Outstanding.

Businesses often struggle with maintaining consistent cash flow due to high DSO, arising from inefficient invoicing, poor communication with customers, and inadequate credit management. While DSO focuses on speeding up cash inflow, DPO aims at delaying outflows to optimize working capital. Together, these two metrics reflect how efficiently a company manages its receivables and payables, or overall cash flow. A good or bad DSO ratio may vary according to the type of business and industry that the company operates in. It suggests that the company’s cash is flowing in at a reasonably efficient rate, ready to be used to generate new business.

What Is Days Sales Outstanding (DSO)?

While you’re at it, ensure there’s a penalty policy for late-paying customers too. Your accounts receivable team can communicate late fee charges in the terms and conditions, ensuring your customers are clear about the penalties. Once invoices have dso meaning been sent, a company must have a plan for following up on outstanding balances and reminding customers of unpaid invoices. This communication should focus on identifying any problems that are preventing the customer from paying the invoice.