How to Calculate DSO on Accounts Receivables
Day Sales Outstanding (DSO) may not exactly be a household term, but for those who work in finance and accounting, it’s a vital and valuable data point of focus that should never be overlooked. The term refers to a measurement of the average number of days a company typically takes to collect revenue once a sale has been completed. Usually completed on a monthly or quarterly basis (sometimes annually), DSO calculations can be highly beneficial once you understand the process of completing them.
Calculating day sales outstanding on accounts receivables may sound like a complicated process, but it’s actually rather straightforward. First, let’s take a closer look at what DSO means for a company and why it’s worth paying attention to.
DSO: Why It Matters
There are so many different factors capable of influencing cash-flow management that knowing where to start can seem next to impossible at times. Between loans, fixed assets, cash that lives within non-interest-bearing accounts and more, it can be tricky to determine what exactly is holding up cash-flow. Many of these factors will be outside of your control, and the first thing you’re likely to notice is the presence of delinquent accounts. Extending credit to customers is somewhat of a necessity in today’s economy, but non-payers and late-payers must be identified quickly so as to reduce the length in which your accounts receivables are tied up.
This is one of the main reasons why it’s important to learn how to calculate DSO on accounts receivables. Knowing what the number looks like will help you to identify the root cause of the issue, thus giving you the knowledge you need to reduce DSO and improve cash flow.
How to Calculate DSO
The actual process of calculating DSO is quite a bit simpler than most people think. You’ll need just three numbers to work with: your current accounts receivable balance, your annual revenue and the number of days in the year (365). Dividing your accounts receivables by your annual revenue and multiplying that number by the number of days in the year will allow you to come up with an accurate day sales outstanding figure. Let’s take a closer look at how this works.
Pretend for a moment that your accounts receivables balance is currently sitting at an even $100,000. If your company tends to bring in $1.4 million in revenue, you’ll want to take the 100,000 figure and divide it by 1,400,000, which will result in .071. Multiply this figure by 365 (the number of days in the year), and you’re left with 26—your current DSO.
So, what exactly does DSO tell you as a number? It effectively gives you a clear view of how long it’s taking for your company to collect on invoices. A DSO of 26, for example, means that it takes roughly 26 days from invoicing to having your bills paid in full; the lower the DSO, the quicker your clients and customers are paying their bills. There are certainly outside factors that can influence DSO, but it typically serves as an accurate signpost for how things are going. Once you have the number in hand, you can think about ways in which to reduce DSO and accelerate cash flow, which should be a common goal across most organizations.
So don’t just assume calculating DSO is outside of your reach or a waste of time. In reality, it takes little more than a few minutes and crunching the right numbers to come up with an accurate result. Need assistance? Billtrust is here to help with more than just calculating DSO — contact us today to learn more about our entire suite of accounts receivables solutions to help improve cash flow and operational efficiency today.