What Is Days Sales Outstanding? DSO Meaning

Managers, investors, and creditors see how effective the company is in collecting cash from customers. This measures how many days (on average) a company takes to pay its suppliers. DPO provides a helpful view of cash liquidity, financial health, and other metrics like average inventory and annual revenue.

Therefore, companies will need to make sure those changes stick and people do not return to the old ways of doing things. Access and download collection of free Templates to help power your productivity and performance. It’s a window into your relationships with vendors, financial responsiveness, and overall reputation. DSO sometimes goes by the names Days billing outstanding (DBO) or Days Receivables outstanding (DRO). Join our exclusive, free Slack community for strategic finance professionals like you.

DSO example

It is also possible to relate the DSO value to another time period, for example to 90 days. The only important thing is that both the number of average claims and the turnover always refer to the same period, otherwise the DSO value is not correct. The sales function of a business must be on board with this renewed focus on customer credit risk. Salespeople do not want to lose a sale because a customer has credit problems. Therefore, companies may need to implement specific incentives and penalties to make sure salespeople and sales managers adhere to the company’s customer credit requirements. In some cases, companies can strategically deploy tools like credit insurance to help mitigate these risks without losing an otherwise attractive customer.

• A high DSO value can put a strain on your company’s cash flows, making it difficult to meet other financial obligations.
• If your A/R efforts rely solely on manually-driven processes, you can carve out unnecessary delays by embracing automation.
• As a metric attempting to gauge the efficiency of a business, days sales outstanding comes with a limitation that is important for any investor to consider.
• Your company’s cash flow is crucial for businesses, as it allows them to pay their own bills on time and avoid taking out loans.
• With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.

To get the most out of this metric, it’s recommended to measure DSO periodically, rather than making changes based on individual DSO results. Working capital is an essential metric when analyzing a company’s operational effectiveness. Companies with high DSO, when compared to their peers, tell us that they take longer than average to receive money from their customers. This might tell us that the company has problems with its collection and that something needs to be done about it. After understanding what days sales outstanding is, we can now move on and explore the purpose of calculating DSO. E-commerce and retail companies typically have low Days Sales Outstanding, often in the range of 7 to 30 days.

Invoiced: Automated A/R insights and more

This communication should focus on identifying any problems that are preventing the customer from paying the invoice. In some cases, an otherwise strong customer may be having cash flow problems and may be appropriate to offer a special arrangement or payment plan. Given the vital importance of cash flow in running dso meaning a business, it is in a company’s best interest to collect its outstanding accounts receivables as quickly as possible. Companies can expect, with relative certainty, that they will be paid their outstanding receivables. But because of the time value of money principle, time spent waiting to be paid is money lost.