Days Sales Outstanding (DSO) measures the average number of days it takes an organization to collect payment after a sale. To calculate DSO, divide the Accounts Receivable balance by daily sales, which you determine by dividing annual revenue by 365 days.
DSO is a crucial Key Performance Indicator (KPI) because it reflects how efficiently a company collects cash from customers. A lower DSO indicates that the company is quickly converting sales into cash, which means less capital is tied up in receivables. This increased liquidity can be reinvested in the business or used to pay dividends to shareholders.
The optimal DSO varies by industry and depends on your company's credit and terms policy. For example:
Additionally, the creditworthiness of your customers affects DSO. Companies that extend credit to reliable customers will have a DSO closer to their standard terms. Emphasizing the collection of past-due receivables also helps in reducing DSO.
KPIs are valuable tools for assessing and tracking how well a company meets its goals. By selecting KPIs that align with the company's strategic objectives, businesses can ensure all departments are working toward common goals. DSO is a vital KPI for understanding and improving cash flow management. For more detailed information on Days Sales Outstanding and assistance in selecting the most relevant KPIs for your organization, contact Porte Brown. Our expertise can help you optimize your financial strategies and achieve your business goals.
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