days sales outstanding
The average number of days it takes a company to collect payment after a sale, measuring the efficiency of accounts receivable collection.
Example
“A DSO of 45 days means the company waited 45 days on average to collect payment after invoicing.”
Memory Tip
DSO = how many DAYS your sales stay OUTSTANDING (unpaid). Lower = faster collection.
Why It Matters
Understanding days sales outstanding helps you evaluate how quickly a business converts sales into actual cash. For investors and creditors, this metric reveals whether a company manages its cash flow effectively and can pay its obligations on time.
Common Misconception
Many people assume that a lower days sales outstanding is always better, but the actual target depends on industry norms and credit terms offered. A company extending 60-day payment terms to customers will naturally have higher DSO than one demanding cash at sale, which does not necessarily indicate poor collection.
In Practice
A retail company with annual revenue of 10 million dollars and accounts receivable of 500,000 dollars would have a DSO of approximately 18 days. This means it takes the company roughly 18 days on average to collect payment after making a sale, indicating relatively efficient cash collection compared to an industry peer with a DSO of 35 days.
Etymology
DAYS (time period) SALES (revenue generated) OUTSTANDING (unpaid, not yet collected).
Common Misspellings
Small business accounting made simple
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See Also
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