Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment for a sale. DSO is often determined on a monthly, quarterly, or annual basis.
To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period and multiply the result by the number of days in the period being measured.
A high DSO number suggests that a company is experiencing payment delays. That can cause a cash flow problem.
A low DSO indicates that the company is getting its payments quickly. That money can be put back into the business to good effect.
Generally speaking, a DSO under 45 days is considered low.
Given the vital importance of cash flow in running a business, it is in a company’s best interest to collect its outstanding account receivables as quickly as possible. Companies can expect with relative certainty that they will, in fact, be paid their outstanding receivables. But, because of the time value of money principle, time spent waiting to be paid is money lost.
That said, the definition of "quickly" depends on the business. In the financial industry, relatively long payment terms are standard. In the agriculture and fuel industries, fast payment can be crucial. Small businesses generally rely more heavily on steady cash flow than large, diversified companies.
Days sales outstanding is an element of the cash conversion cycle and may also be called days receivables or average collection period.