DSO Calculation Formula

Day Sales Outstanding Formula and Calculator

Days Sales Outstanding, also known as DSO, allows corporations to best assess how they are doing when it comes to collecting outstanding accounts receivables. One of the leading causes of a business going bankrupt is poor cash management. As a business owner, calculating your businesses’ DSO is an excellent way to analyze your corporation’s cash flow. Time spent waiting on cash to be collected leads to just as much cash being spent, so it’s a good idea to be punctual with keeping track of your situation when it comes to overdue receivables.

To calculate your DSO, you must first decide on the length of time that you are going to analyze. The recommended amount of time is three months in order to get an accurate estimate for the DSO. From there, you then insert your accounts receivable and net sales from your balance sheet and income statement, respectively. After that, you select the window of time you wish to analyze.

The resulting DSO will be shown as the average number of days it takes for your business to collect the payments from the outstanding invoices. Here we have provided you with a Days Sales Outstanding calculator to get your results. Simply input the information required that is listed above, and you will get an accurate result of your cash flow situation.

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Day Sales Calculation

Accounts Receivables
Total Sales in Period
Start Date
End Date
Period Length

What Is Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) is a type of measure that calculates the average number of days it takes for any company to collect on their payments after a sale is made. Invoicing is generally used as the standard practice in businesses with the exception of transactions that happen upfront, such as in restaurants or in retail stores. The amount of time it takes to collect on these invoices is what is usually considered when deciding to calculate the DSO of your business.
Many business owners who use invoices can ensure the collection of their payments using DSO. If you notice that the DSO for your company is relatively higher than it was before or possibly more elevated than the average business, then you can prepare and take the necessary steps to investigate and counteract this.

DSO formula

To calculate the days sales outstanding by hand instead of using a calculator, you will first need to look at your accounts receivable and net sales over any specific period of time. Most business owners will choose to look at their days sales outstanding for last year to simplify the process. From there you simply use the formula below to calculate the DSO.

DSO = Accounts Receivable / (Net Sales/ # of days)

Accounts Receivable is all the money that is owed to your company and can usually be found on the company balance sheet. At the same time, the net sales is the total amount of revenue made on sales and should be available on your income statement. From there all you have to do is add them to the day sales outstanding formula and you should get the resulting average.

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DSO Benchmarks

The average DSO for the industry is an important way to get a better understanding of days sales outstanding and the role it plays in the business. Different businesses can have varying outlooks on what a reasonable DSO should be. This is why it’s important to know what the average days sales outstanding for your business is and how it stacks up to the industry average.

For a business owner, it is essential to know the benchmarks that your competitors have set up. If they are lower than yours then you should see whether it is worth reducing the duration of payment terms.

Value of DSO in Business Operations

The reason that it is worth monitoring for any changes in days sales outstanding is that it allows, not only for you to identify issues within the business, but also any issues that may relate to cash flow. An increase in DSO can possibly lead to not being able to pay for all financial obligations on set time intervals.

Causes of DSO Changes

There are many possible causes for a change in DSO; one possible reasoning can be that an increase in sales involving individuals with poor credit can lead to a much longer DSO term due to people not being able to pay their invoices on time. Another more short term factor may be due to an increase in credit sales. If a large number of invoices aren’t being paid back frequently, then it may be wise to investigate the issue.

No matter what type of system you have for collecting payments, it’s important to have a way to manage invoices easily. One of these ways is to have automatic reminders set up so that you won’t forget to collect on any invoices. Another way to manage the collection of payments is to keep your list of invoices properly organized and have a good track of the general flow of payments coming in.

DSO and You

DSO is one of the many tools in the corporate world that allows business owners to get a better understanding of the internal and external situations of their business. To use days sales outstanding most efficiently, it is important to make regular use of it to see how your business is doing when it comes to cash flow and invoice collection. This will enable you to identify issues that may have arisen and/or ones that may show up in the future.

SRJ Chartered Accountants Professional Corporation is Chartered Accountants in Toronto & Mississauga who specialize in helping individuals and corporations reduce taxes and tax planning. For more information on days sales outstanding and consultation on industry averages, contact us at info@srjca.com or 647-725-2537

Frequently Asked Questions

DSO is best calculated by determining first the time frame, and then dividing the accounts receivable of that period by the total credit sales also from that period, then multiplying the resulting answer by the number of days in the period.

As suggested above DSO can be simply calculated the same way through excel by inputting the formula as such, simply input the data as required for the total DSO using the data necessary:

=Accounts Receivable / (Net Sales/ # of days)

A good range for DSO can depend on the average number of days for terms to be collected. An ideal range for DSO should never go above 50$ of your overall terms.

Days Payable Outstanding, also known as DPO is the average number of days it takes for a company to fulfill its payments. To calculate DPO you simply take the accounts payable and divide it by the cost of goods sold for each day.

DPO = Average AP/COGS per day

Accounts receivable days are usually calculated using the revenue that your corporation made and the accounts receivable amount. To be more specific, you divide the total revenue made by your accounts receivable amount and multiply that by the number of days in a year. You should then get the resulting amount of days it takes for a company to collect upon their invoices.

Accounts Receivable Days = (Accounts Receivable / Revenue) x 365

As mentioned above DSO is the average time it takes for a company to collect on their accounts receivable,while DPO is the amount of days it takes for a company to pay off its accounts payable.

On the other hand DIO, abbreviated for Days Inventory Outstanding is the average number of days that a company holds onto it’s inventory before being sold or used up.