Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO)

KPI Details

Days Sales Outstanding (DSO), sometimes referred to as Average Days in Accounts Receivable (AR), measures the quality and efficiency of the AR Department in billing customers and collecting payments from those customers after a sale of goods or services has been made. Under all circumstances, companies should look to produce a low value for this Key Performance Indicator (KPI) as the amount of time required to collect money after payment affects the company's cash flow and liquidity. Poor performance may also diminish the company's ability to pay off its own liabilities. Extended payment times may be related to inefficiency or error-prone billing processes, inconvenient payment options (e.g., payments cannot be collected through web-based means, etc.) and/or ineffective credit analysis (i.e., credit lines were extended to customers who my be unlikely to pay on-time).

KPI Definition

The number of days, on average, required for a company to collect their outstanding accounts receivable balance (the amount of money owed by customers/clients) from customers. Days Sales Outstanding (DSO) is one of three components of the Cash Conversion Cycle.

KPI Best Practices

• Review credit approval processes regularly to reduce the number of bad accounts
• Offer online payment options for customers to speed up invoice processing time
• Well-defined processes for the Collections function to receive payment from delinquent accounts

KPI Calculation Instructions Days Sales Outstanding (DSO)?

Two numbers are used to calculate this KPI: (1) the company’s accounts receivable balance (i.e., the amount of money owed to the company) at the end of the measurement period, and (2) the daily average amount collected by the AR Department from sales based on credit during the measurement period. To calculate DSO, divide the total balance of the company’s accounts receivable by the average amount collected from customers per day. To calculate average credit sales per day, divide the total credit sales by the number of days in the measurement period. DSO, along with Days Payable Outstanding (DPO) and Days in Inventory, is a component of the Cash Conversion Cycle (CCC). DSO is typically measured at monthly, quarterly, annual intervals.

KPI Formula :

(Ending Accounts Receivable Balance / (Average Amount Billed to Customers per Day))