Days Sales Outstanding DSO

Days Sales Outstanding or DSO is a key working capital metric. We will cover the definition of Days Sales Outstanding, go through an example of how to calculate the DSO ratio, discuss the importance of Days Sales Outstanding, and show 5 ways to analyze and improve DSO.

Days Sales Outstanding, which is sometimes called Average Collection Period, is the average number of days that customers take to pay invoices. From a cash flow perspective, we would like DSO to be as low as possible. It is important to understand that if Days Sales Outstanding goes up, then cash flow goes down. The reverse is also true: if DSO goes down, then cash flow goes up.

⏱️TIMESTAMPS⏱️
0:00 Introduction to DSO
0:21 Days Sales Outstanding definition
0:46 How to calculate DSO
1:09 DSO example
2:54 Importance of Days Sales Outstanding
3:43 Analyzing and improving DSO
5:31 DSO and business seasonality
6:18 DSO trend analysis

Why is DSO so important? Because payments from customers are a key driver in Cash From Operating Activities! The incoming cash from customers paying on time and in full is as important for a company as it is for human beings to have oxygen to breathe. If you get cash in from customers, you can pay the invoices sent by your suppliers, the salaries of your employees, the taxes you owe to the government, and the interest you owe to the bank. If you don’t get cash in from your customers, then you might temporarily stay in business by borrowing more money or selling assets to pay your bills. If there is a structural problem with getting paid by customers, a company is likely to end up going bankrupt. Days Sales Outstanding is the key metric to measure the ability to collect.

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!