What is DSO or Days Sales Outstanding?

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Jul15

What is DSO or Days Sales Outstanding?

Know More: Creating a Credit Policy, FAQs, I have past due customers, what do I do?, What makes a Good Collector?

You should research how you are handling your accounts receivables and if your control over them is effective. This will help you update or make sure your credit policy is working effectively for your business. You can do this by using the Days Sales Outstanding (D.S.O.) formula.

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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