The formula for days sales outstanding is: Conversely, a days sales outstanding figure that is very close to the payment terms granted probably indicates that a company's credit policy is too tight. Generally, a figure of 25% more than the standard terms allowed may represent an opportunity for improvement. There is not an absolute number of days sales outstanding that represents excellent or poor accounts receivable management, since the figure varies considerably by industry and the underlying payment terms. The measurement can be used internally to monitor the approximate amount of cash invested in receivables. When measured at the individual customer level, it can indicate when a customer is having cash flow troubles, since the customer will attempt to stretch out the amount of time before it pays invoices. It is used to determine the effectiveness of a company's credit and collection efforts in allowing credit to customers, as well as its ability to collect from them. What is the Days Sales Outstanding Calculation?ĭays sales outstanding (DSO) is the average number of days that receivables remain outstanding before they are collected.
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