Days Sales Outstanding is the number of days it takes an organization to collect its accounts receivable from its customers. It is calculated by dividing the Accounts Receivable balance by the daily sales. Daily sales can be calculated by dividing the annual revenue by 365 days.
Why is this KPI (Key Performance Indicator) important? Having a lower Days Sales Outstanding means cash is being received quicker from the company’s terms customers. Less funds are tied up in Accounts Receivable and more cash can be used toward investing in the business or paying dividends to the company’s shareholders.
What should a company’s DSO be? The optimal DSO range would depend on the industry and the organization’s credit and terms policy. Retailers, who sell directly to the consumer, have a DSO of zero. Its customers pay immediately with cash or credit card. A utility company might have standard terms of 30 days, so its DSO would generally be between 45 – 55 days. Businesses that sell to other businesses may have even longer terms, which would increase their expected DSO.
In addition, the creditworthiness of the company’s customers affect the Days Sales Outstanding. Organizations that extend credit to customers with better credit will have a DSO closer to their standard terms. Plus, organizations that emphasize the importance of collecting past due receivables will reduce its Days Sales Outstanding.
Key performance indicators (KPI) can be an excellent tool for measuring and monitoring how the organization is meeting its goals. By choosing KPIs in each area of the company that best aligns with the corporate’s strategic plan, a business obtains the confidence that all areas are working toward these same goals. Contact Porte Brown to obtain more information on Days Sales Outstanding and selecting the best KPI’s for the organization.
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