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What is Days Sales Outstanding (DSO)?

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Days sales outstanding (DSO) is a metric that shows the average number of days a company takes to retrieve cash payments from customers that paid on credit.

The concept of days sales outstanding (DSO) provides significant insights into a company’s cash flow and operational efficiency. It calculates the number of days a company takes, on average, to retrieve cash payments from customers who have purchased goods or services on credit. DSO is calculated using the following formula:

DSO = (Accounts Receivable / Total Credit Sales) x Number of Days in Period

A low DSO shows a company can swiftly convert its credit sales to cash, signifying a healthy cash flow. On the other hand, a high DSO suggests it takes longer to convert credit sales into cash. It is an important metric for modern debt collection and can be used to determine dunning approaches.

Days Past Due (DPD)

Days past due (DPD) represents the number of days a payment has been delayed beyond its due date. In other words, it calculates the time between when the earliest unpaid payment was due up to the present. 

Differences Between DPD and DSO

While both DPD and DSO provide valuable insights into a company’s financial health, they offer distinct perspectives. DSO measures the average time it takes to collect cash from credit sales, while DPD specifically tracks how long a payment has been overdue. Therefore, DSO is more about overall cash conversion efficiency, while DPD focuses on delinquency or delayed payments.

Comparing Days Payable Outstanding (DPO) and Days Sales Outstanding (DSO)

Days payable outstanding (DPO) calculates the average time a company takes to pay its bills. DPO provides insights into a company’s payable management efficiency (money it owes), whereas days sales outstanding (DSO) measures its efficiency in collecting receivables (money it’s owed).

Put simply, DPO indicates how long a company holds onto its cash before paying its bills. DSO, on the other hand, reveals how quickly a company collects cash from its credit sales. Companies must carefully balance their DPO and DSO to effectively manage their cash flow at all times. 

Updated on 28. November 2023

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