Days sales outstanding or DSO is probably one of
the most critical performance metrics in the debt collection process. It indicates an average number of days
that a company takes to collect revenue after a sale has been
made. Regular DSO requires three numbers: total accounts receivable, total
credit sales for the period analyzed, and the number of days in the period. Days
sales outstanding is calculated as:
Dayssales outstanding = Accounts receivable \ Total credit sales for the period *
Number of days in the period.
A
low DSO number means that it takes a company fewer days to collect its accounts
receivable, while a high DSO number shows that a company is selling its product
or services to customers on credit - essentially a free loan - and taking
longer to collect money.
DSO industry averages reflect a wide range of
operational, structural, managerial, economic and credit nuances. For
instance, at first glance, export sales would seem to be a principal reason for
a higher DSO since many export-oriented industries -- oil and gas equipment,
software technology, communications equipment and scientific and technical instruments
-- have DSO averages in the 60-70 days range.
Meanwhile, the advertising and marketing industry
has one of the lowest export sales percentages, yet has by far the highest day sales outstanding definition
industry average.
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