D.S.O. = Current End of Mont A/R Balance x 90
Total Sales for past 3 months
If you multiply your current end of month A/R balance by 90 and divide that number by total sales for the past 3 months, you will get the number of days sales outstanding. For example, if your current month end receivables are $12,000 and your total sales for the past 3 months are $30,000, using the DSO formula the result would be:
$12,000 x 90 = D.S.O. of 36 days
$30,000
When you decide to extend credit to your customers, you need to decide on how you want to extend that credit. You don't want to be to lenient or to strict. If you are to lenient, you can create a credit loss. If you are to strict, this could affect sales. You want your terms to be acceptable to your customers, whether your terms are net 30, net 45 etc. Your credit department must have the backup and reinforcement from supervisors and sales force to make this work.
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