You may have seen the term DSO bandied about in the accountancy and finance sector - and wondered what on earth it means. In this itsettled explainer, we’re going to demystify DSO and explain exactly why it’s so useful for businesses.
So, let’s start off with the definition. Days Sales Outstanding (often referred to as DSO) is a measure of the average number of days that a company takes to collect payments for all of its sales. It’s often determined on a monthly, quarterly, or annual basis.
Due to the nature of DSO, it is mostly only useful for companies who trade on credit.
Why is DSO a useful tool? Well, it can help analyse a company’s cashflow. A high DSO number suggests that a company is experiencing delays in receiving payments, and this can cause a cashflow problem. On the other hand, a low DSO number suggests that a company is getting paid quickly, which allows the money to be put back into the business quicker, allowing for speedier growth. A low DSO number is generally considered to be 45 days or under.
Looking at a company’s DSO over a single period can be a good benchmark for quickly assessing a company’s cashflow. However, it can actually be more useful to look at the company’s trends in DSO over time. These trends can be used to predict potential signs of financial trouble.
Next week, we’ll be covering the exact DSO calculation we use, and explain the logic behind itsettled’s own DSO calculator.
We hope you enjoyed this itsettled article, and hope you feel empowered to make the right financial decisions for your business with our itsettled explainers and guides. If you need help with invoice queries or late payment, we’re happy to help! If you have any questions, or would like to see us cover a new topic, simply email us at email@example.com.