Days sales outstanding
By Jude Wallis
Days sales outstanding, or DSO, is accounts receivable divided by credit sales for a period, multiplied by the number of days in that period. It is the average collection wait.
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DSO converts a balance into a length of time, which is what makes it comparable across companies of different sizes. A rising DSO says money is arriving later, and money arriving later has to be funded from somewhere in the meantime.
Two things distort it. Cash sales in the denominator dilute the figure, because those sales never created a receivable. And a year-end receivables balance measured against a quarter of sales mixes periods, which is the most common way the number comes out wrong.
Collection speed is one leg of the cash conversion cycle, alongside inventory and payment terms with suppliers. The DSO calculator is the conversion, how days sales outstanding works is the explainer, and DSO against DPO is collection speed set against payment speed.