Days sales outstanding (DSO)

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What is Days Sales outstanding?

Days sales outstanding (DSO) is an accounting ratio that measures the average number of days a company takes to collect payment after the sales have been made on a credit. ¹ When a company makes a sale on credit, it creates an accounts receivable. Thus, days sales outstanding also measures how quickly the company is converting its accounts receivables into cash. It is measured by dividing accounts receivables for a period (monthly, quarterly, yearly) by net credit sales and multiplying this figure by the number of days in the period.

In this article, we'll explain the usage of days sales outstanding as performance measure for businesses and how to improve it using a collecting account. If you have operations in other countries, receiving cash from customers can be quite costly due to receiving bank fees. So, we'll introduce a multi-currency account with Wise which will cut the cost on your global accounts receivables.

With Wise, you can improve your days sales outstanding figure by collecting your cash more efficiently and free of charge and keep track of your transactions through the mobile app and link them to an accounting software called Xero.

Let’s get started!

Basic fundamentals of the ratio

The formula to calculate how many days it takes a company on average to convert its accounts receivables into cash is as follows.²

Days sales outstanding = Accounts Receivables / Net credit sales x Number of days in a period

Days sales outstanding is used by companies to assess the effectiveness of its credit policies and collection efforts. The DSO number solely can’t be used as a performance metric as there is no such number of days which can be considered as good in terms of DSO. The number of days sales remain outstanding varies from industry to industry and is also dependent on basic payment terms.

As an example to calculate DSO for a company, let’s suppose that a company has annual net credit sales of $1,400,000 and its average accounts receivable balance is $250,000. DSO can be calculated as follows by using the formula mentioned above.

| DSO = $250,000 / $1,400,000 x 365 = 65 days |

This indicates that the company takes an average of 65 days before receivables are collected. It is pertinent to mention here that cash sales are not included in the calculation of DSO as the cash is collected at the time of transaction and thus cash sales have a zero DSO.

Uses and limitations of the ratio³

It is important that a company keeps checking the trend of DSO over a period of time. For example a monthly trend can be checked for changes in the DSO figure. If the number of days is increasing, it means that the company is allowing its cash starved customers to make purchases on credit who are unable to pay back in time. It may also indicate that customers are taking longer time to pay their expenses which either reflects their dissatisfaction or the leniency of sales people in terms of allowing longer payment period just for the sake of increasing sales. A higher DSO may entail serious cash flow problems for the company and thus it needs to be kept within a reasonable limit. A lower DSO is desirable as it indicates that the company is able to collect cash earlier from the customers and thus can use this cash in other operational activities. Liquidity and cash flow of the company is improved with a lower DSO figure.

Save time and money collecting your accounts receivables

Do you know why you receive less amount than originally sent by your clients?

When the money is in transit, correspondent banks in between may deduct their handling fees and the receiving bank charges a fee to receive the payment. .

This, not only adds to your collection cost but also puts some extra work for you and your clients as they would have to make another transaction to cover the missing amount. It takes 2–5 working days to reach their destination, however it is possible that they can take longer due to time differences between the sending and receiving country, or multiple intermediary banks involved with delivering your money.

Luckily, there’s an easy solution to this - Wise multi-currency account provides you with local account details for EUR, GBP, AUD, NZD, USD and PLN. This gets rid of both the receiving and intermediary bank fees. You will always get a great deal by avoiding the unfair exchange rates set by banks. You can hold more than 50 currencies at once, and convert between them in seconds. Your money will arrive faster as it doesn’t have to go through any correspondent banks. You can also use it to send in 50+ currencies across the world. Here are some additional services Wise offers:

  • Easy integration with accounting software – including Xero
  • Direct debit for GBP and EUR accounts for recurring payments and receivables
  • USD global – pay overseas contractors in USD
  • Borderless account – hold, send and receive funds all through one multi-currency account
  • Manage payroll in 38 different currencies – see which countries you can and can’t send to here.
  • Powerful open API – customize services to suit you, from automating payments to connecting business tools

Set up Wise multi-currency account for free, and start saving time and money today.

Sources:

  1. Corporate finance institute blog post
  2. Corporate finance institute blog post
  3. Investopedia blog post

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This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.

We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.

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