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DSO stands for Days Sales Outstanding

It is a commonly used measure for the invoicing collection process. Investopedia defines DSO as “A measure of the average number of days that a company takes to collect revenue after a sale has been made”. If you are strictly a cash business your DSO will be 0. If you generate invoices for your customers and give them credit terms (some number of days before they are supposed to pay) then you will will have an accounts receivable balance and thus a DSO . You can use the DSO number to measure the efficiency of your collections. Since DSO is so popular you can also use it as a gauge against other companies in your industry.

Calculating your Days Sales Outstanding

The calculation is as follows.

Calculate your days sales outstanding

Example

Here is a very simple example of how to calculate DSO.

A company started June with $700 in receivables (Invoices still not paid from May and earlier).

Lets say the company had sales of $1100 in June.

  • The company got cash for $100 that was not cash for invoices. Some one came into their office and gave them $100 for a widget that never got invoiced.
  • They generated invoices with Net 30 day terms (customer has 30 days to pay) for the other $1000. These are “credit sales”. The total Credit/Invoice Sales for June will be $1000 (not $1100 since they got cash for $100 and never invoiced it, the DSO on that cash is 0).
  • During the month they got payments on invoices of $500.
  • So $700+$1000-$500=$1200 for their accounts receivable at the end of June. 700 that was still open + $1000 in new invoices – $500 in payments
  • NOTE: it does not matter what invoices the $500 got applied to or even if it gets applied for the DSO calcualtion. It just matters what the A/R is at the end of June.
  • Their accounts receivable at the end of June would be $1200. The DSO for the month of June would be $1200/$1000 X 30 (# of days in June) = 36.

A 36 day average to get paid is not to bad. Generally speaking, if your DSO is under 40 (assuming Net 30 day credit terms) you are fairly efficient at collecting your money.

DSO measures efficiency not effectiveness.

In a future article we will show you the problems with DSO. Your goal is to get paid faster and there are other performance indicators that can be used, along with DSO, to get a clearer picture of your collections effectiveness.

Check out this next post in this to get a couple of alternative ways to measure your effectiveness

14 Responses to “The DSO Calculation (Days Sales Outstanding)”

  1. [...] an earlier post I talked about calculating your DSO.  The most well know way to benchmark your A/R is by using the Days Sales Outstanding (DSO) [...]

  2. Ken says:

    As cash is received, how are you determining if it is cash toward Credit/Invoice Sales or against the past due receivables? In your example, you are deducting $100.00 from Credit/Invoice Sales (new invoices)

  3. Mohammad says:

    When using this formula the AR will include the GST portion as it would include the total receivables from the customer who when invoiced was also invoiced the GST and would pay for the same too. My question is should the invoiced sales for the period include the GST portion or not?

  4. @Ken, DSO doesn’t take into account what is paid against past due receivables vs current receivables. DSO is just the average day it takes to get paid at a point in time. For a measure of effectiveness take a look at the CEI calculation here http://www.greenbill.com/2009/03/collection_effectiveness

  5. @Mohammad, it will wash out the average and won’t make a difference. GST would be considered a credit sale just as you the sales of your goods and services are. If you have a lot of short-payments for GST then you can consider removing them from the calculation and use DSO in conjunction with DDO (days disputes outstanding).

  6. Chris says:

    Very informative article. I still have a question about “Monthly Credit Sales”, and how to calculate correctly. Can you please confirm that “Monthly Credit Sales” should be the Sum of all invoices produced in the month not currently in dispute minus ALL cash received in that month (regardless of month of original invoice). Is this correct, or can you expand? Thanks

  7. I think the confusion may lie in my description above. I’m updated the post above to try and clarify some of the questions. Please let me know if it clears some of the questions up.

  8. @Chris, Monthly Credit Sales should be the sum of all the invoiced sales with the credit memos relating to sales backed out. You should not back out the cash received for invoices. That will get taken care in you net A/R balance. Disputes and how to handle those is a whole other blog post that I am working on but if you have a high write-off rate (you end up writing off 90% of those disputes against sales and not an expense account) and the disputes happen in the same month as the invoice then yes back them out of credit sales. Most of the companies we work with do not back out of credit sales and if they are removed at all they come out of the A/R number. example: total a/r – total disputes = “accounts receivable” that I reference in the calculation above.

  9. Pat says:

    What is the true def. of “credit sales”. How would credit card sales be addressed. For example, the sale itself as it relates to the credit card transaction is calculated into the total for sales – but we did not actually extend credit to this type of customer. I would define credit sales as extending terms (net 30). Should credit card transactions be backed out?

  10. @Pat, yes “credit sales” are where you invoice and extend credit terms to your customers. Any sale that is point of sale or where its to be paid right away (pos,cash and credit card sales) should be backed out or it will skew your number. Of course if they pay by credit card on an invoice then those numbers should stay in your DSO calculation

  11. Christina says:

    Thanks – very helpful and easy to follow along…

  12. Venkat says:

    @Joshua,
    Above statment is not clear for Me. Could you please clarify my doubt – “Any sale that is point of sale or where its to be paid right away (pos,cash and credit card sales) should be backed out or it will skew your number.” – In this statement it is clarified that Credit Card sales need not be considered, but immediately in the next statement – “Of course if they pay by credit card on an invoice then those numbers should stay in your DSO calculation” – Credit Card sale is considered. which one is correct?

  13. Sai says:

    Hi,

    If i am calculating DSO for the current month and at the end of the month if i create an invoice and it has payment term due after 30 days, do i need to consider this sale in credit sales? Each invoice may have different payment term and some invoices may not be due in the month where i am calculating DSO!

    Correct me if this formula is incorrect for accurate DSO, (We are calculating DSO for 90 days)

    Total receivables from the customer for the sales during that period / Total sales which are not overdue during that period X 90 days.

  14. @Venkat Include anything that is invoiced on “credit” where you give them time to pay. How they pay is irrelevant, I was just giving an example.

    @Sai Yes, include any sale where you invoice and give them time to pay. In your formula you divide by ” Total sales which are not overdue during that period”, it should be the “total sales for that 90 day period”

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