Understanding Days Sales Outstanding (DSO): A Key Metric for Cash Flow

When measuring revenue collection for a company, days sales outstanding is the calculation most people choose. Also known as average collection period, days sales outstanding essentially gauges the average time it takes for a company to receive its cash after a sale has been made. 

Calculation

It is calculated by dividing account receivables by the average daily sales revenue. Account receivables is a line item of short term assets on the balance sheet. Average daily sales revenue can be calculated as annual sales divided 365 to come to average daily sales. The average days sales outstanding is three months or 36 days. That means that from the point of purchase, the account receivables are converted into cash and received as payment thirty-six days after.

Seasonal sales

A seasonal pick up in sales will increase the days sales outstanding calculation by default. Keep that in mind. Normally this figure is used to gauge how the credit policy should be made. For a company that has an average collection period higher than 36 days , they may want to be more strict on their return policy or collections process. Conversely if the collection period is shorter than 36 days, they may want to be more lenient.