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Day sales outstanding definition

Description

Day sales outstanding (DSO) ratio is the same as receivable turnover ratio, only it provides information on company’s customers’ debts (accounts receivable) collection effectiveness in days, and not in times. Data needed to calculate this ratio is collected from balance sheet and income statement.

As receivable turnover ratio, this ratio is interesting for company’s owners as it also indicates the ability of company’s managers to collect customers’ debts.

Norms and limitations

Low value of this ratio shows that the company needs less days to collect its debts. As more days mean longer debts collection period.

However in general there is no norm for the DSO, as it depends on the industry. A very low value of this ratio shows that the company mainly works on cash basis.

Formula

Net sales (revenues, sales) can be described as sales deducting returns and discount for customers.

Accounts receivable can be briefly described as company’s made sales but not collected money. It can be easily be found on balance sheet.