Days Sales Outstanding - DSO Calculator

Our DSO calculator allows you to quickly estimate how long, on average, it takes a company to receive all the payments from its customers.

This information lets you better plan and manage your company's finances and cash flow.

Below, we explain the definition of days' outstanding sales, calculate its value and use the results to optimize your business further.

What are days' sales outstanding?

Days Sales Outstanding (DSO) indicates how long it takes a company to retrieve all client payments.

The DSO calculation results show the average number of days the company waits for the payments.

DSO is a key efficiency metric, and keeping it under control is crucial to maintaining cash flow in balance.

If you wish to analyze your company's cash flow, use the Free Cash Flow Calculator and the Levered Free Cash Flow Calculator.

How to calculate days sales outstanding?

To calculate DSO, you can use our calculator above or the DSO formula directly.

To find the days' sales outstanding value, follow the procedure:

Calculate the value of the average receivables by working out the mean value of the initial accounts receivable and ending accounts receivable. (F + I )/ 2
Check out the company's annual revenue. It is available on the income statement of the analyzed period.
Determine the length of the fiscal year.
Input the values into the DSO calculator or use the formula below.

The DSO formula

DSO = (average_accounts_receivable / revenue) * days

Where:

average_accounts_receivable - the average value of accounts receivable over the analyzed period;
revenue - Annual revenue;
days - the fiscal year length;

Sometimes for simplicity, accountants use the ending value of accounts receivable. So both methods are valid, but if you choose one, you need to be consistent and analyze different periods or companies using the same formula.

Importance of DSO in Financial Analysis

DSO analysis

Understanding Credit Sales

DSO is intrinsically tied to credit sales. When a company sells its products or services on credit, it trusts that the customer will promptly settle the invoice.

This trust is quantified by the DSO, indicating the number of days it takes for a company, on average, to collect payment after the sale.

Revealing the Average Accounts Receivable

A central component of DSO is the average accounts receivable. This is calculated by taking the beginning accounts receivable from the balance sheet, adding the ending accounts receivable, and then dividing by two. This gives an understanding of the money owed to a company at any given time.

Measuring the Efficiency of Collections

The primary purpose of DSO is to determine the efficiency with which a business can collect payment after an invoice is issued. A low DSO number is indicative of a company that can quickly turn its credit sales into cash. On the other hand, a higher DSO suggests a lengthier duration of days to collect, potentially pointing towards inefficiencies or issues in the collection process.

Benchmarking with Average DSO

To truly grasp the effectiveness of a company's credit policies and collection efforts, comparing its DSO with the industry's average DSO is essential. While a low DSO is generally favored, what's considered low or high can vary by industry. Hence, having a benchmark provides context to the DSO number and allows companies to set realistic and competitive targets.

Implications for the Balance Sheet

DSO has a direct impact on a company's balance sheet. A higher DSO means that there's more money tied up in accounts receivable, which could otherwise be used for other operational needs or investments. Conversely, a low DSO suggests efficient credit and collection policies, which can enhance a company's liquidity position.

DSO is more than just a metric; it reflects a company's financial health and operational efficiency in the realm of credit sales. Attention to this number can guide improvements and steer a company toward more profitable avenues.

The real-life applications of DSO metric

DSO indicator can be used to analyze the current company situation or a trend for a longer period.

By analyzing the current DSO value, you can examine the company's efficiency in operating its working capital. The lower the value is, the better the company's cash flow.

The low value of DSO implies an efficient collection of cash from customers and translates into higher Free Cash Flow.
The high value of DSO indicates an inefficient collection of cash from customers and translates into lower Free Cash Flow.

However, companies seek to minimize DSO. The high value of this metric does not necessarily mean the company is in poor financial condition. Some industries require long payment terms, and if the company has enough working capital, it is simply part of its business model.

An investor can tell if the company's cash flow is improving or deteriorating by performing a DSO trend analysis.

Finally, knowing the DSO value helps to allow us to perform a more in-depth analysis.

DSO reveals problematic customers.

By comparing the DSO value against individual customers, you can identify the customers that drag down your cash flow.

DSO estimates financial risk or trade credits granted.

High DSO values translate into higher financial needs for the company.

If the company needs a lot of cash to support its sales by crediting the customers, it is critical to ensure that financing cost is manageable.

You can use our WACC calculator to determine the weighted average capital cost the company raised.

How to decrease Days Sales Outstanding?

If you wish to improve the DSO value for your company, there are several measures you can undertake.

Offer incentives to pay upfront. They may take the form of discounts.
Restrict trade credits to the customers who pay on time.
Consider factoring services.

Impact of DSO on Business Valuation

Days Sales Outstanding has profound implications for a company's valuation, especially when considered in conjunction with other financial metrics. Let's explore how DSO influences business valuation.

Integration with Other Metrics

DSO doesn't exist in isolation. When combined with days inventory outstanding (DIO) and days payable outstanding (DPO), it becomes a part of the cash conversion cycle – a key indicator of a company's operational efficiency.

The cash conversion cycle captures the time it takes to turn inventory investments and other resources into cash flows from sales. A shorter cycle is often indicative of better operational efficiency and can bolster a company's valuation.

Insights from the Days Sales Outstanding Formula

The DSO formula, which divides average accounts receivables by total credit sales and multiplies by the number of days in the period, offers a nuanced view of a company's financial health.

If the company's DSO is increasing over time, it means it's taking longer to collect on outstanding invoices. This can be a red flag for potential investors or buyers, suggesting inefficiencies or potential issues with the quality of annual sales.

Evaluating Cash Flow and Liquidity

A lower DSO indicates that a company can quickly convert its credit sales into cash. This not only portrays effective credit and collection policies but also impacts the company’s cash flow positively.

When a business has a shorter duration of days it takes to collect, it can improve its liquidity position. This enhances the company's attractiveness to potential investors, as they often prefer businesses with strong cash flow.

DSO Over Time – A Trend Analysis

While a single DSO number provides insights, the trend of DSO over time is even more telling. A steadily increasing DSO might indicate that customers are taking longer to pay, which can be due to several reasons like deteriorating product quality, increased competition, or economic downturns.

On the other hand, a decreasing DSO trend can signal improving operational efficiency. Investors and potential buyers closely observe these trends as they reflect the company's ability to manage its accounts receivable effectively and can influence its valuation.

Comparative Analysis with Peers

When valuing a business, it's also essential to compare the company's DSO with its competitors or industry average. If a company's DSO is significantly higher than its peers, it can be a sign of inefficiencies or issues that its competitors don't face. Such discrepancies can affect the perceived value of the business in the market.

In conclusion, while DSO is fundamentally a measure of a company's efficiency in collecting payments, its implications run deep, influencing various facets of business valuation.

A keen understanding of DSO and its associated dynamics is crucial for investors, stakeholders, and business owners alike.

Authors

Created by Lucas Krysiak on 2022-10-24 16:15:44 | Last review by Mike Kozminsky on 2022-10-26 16:59:19

Days Sales Outstanding Calculator

Estimate how long a company needs to collect the payments.