SaaS Metrics Encyclopedia
Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes for a company to collect payment from its customers after a sale has been made. DSO is a key indicator of a company's efficiency in managing its accounts receivable and cash flow. It is calculated by dividing the average accounts receivable by the average daily sales and multiplying by the number of days in the period.
Why is DSO an Important Metric to Monitor?
DSO is important for assessing a company's efficiency in managing its accounts receivable and its overall liquidity.The formula to calculate DSO is:
(Accounts Receivable / Total Revenue ) * Number of Days in the Period
Here's a breakdown of the components:
Accounts Receivable: This represents the total amount of money that customers owe to the company for products or services that have been delivered but not yet paid for. It is found on the company's balance sheet.
Total Revenue: Also known as gross revenue or sales revenue, is the overall amount of money generated by a business from its primary operations over a specific period of time.
Number of Days in the Period: This is the time frame for which you want to calculate DSO. It is typically a month, quarter, or year, depending on the reporting needs of the company.
Improving Days Sales Outstanding involves strategies that accelerate the collection of payments from customers.
In summary, improving DSO requires a combination of efficient processes, customer incentives, and proactive credit management to ensure timely and consistent cash inflows from sales.
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