Accounts Receivable Collection Period, Days Sales Outstanding in Receivables (DSO)

Because of the importance of cash in the management of your company, it is in your best interest to collect outstanding debts as soon as possible. By quickly converting sales into cash, you have the opportunity to put the money to use – to reinvest and generate additional sales.

The DSO (Days Sales Outstanding) can be used to determine if a business wants to hide weak sales or is generally ineffective in generating revenue. Most companies calculate their DSO on a quarterly or annual basis and use that information to determine how quickly their customers pay their bills.

Days Sales Outstanding (DSO)

In tough economic times, it is imperative to manage your A/R carefully. Unfortunately, the traditional way of measuring the performance of Accounts Receivable is severely damaged. The method is so precise that precise measures are required.

Days Sales Outstanding (DSO) refers to the number of days required to recover debts over a specified period. It is a crucial business economic indicator because it shows the age of the accounts receivable of a business and the average time it takes to convert those receivables into cash. DSO indicates the number of days’ worth of sales that are due but unpaid within a specified period. Having a higher DSO can be costly. A good indicator is that the DSO should not exceed 33% to 50% of the terms of sale. If these conditions are met within 30 days, an acceptable DSO or “safe collection period” is typically 40 to 45 days. A receivable DSO term of 15 days is a candidate for collection. Keep in mind that the less money is invested in accounts receivable, the more money can be used for investment in your business or to create dividends.