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Days Sales Outstanding (DSO) Calculator

Measures the average number of days it takes for a company to collect payment after a sale.

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Average Accounts Receivable

Formula first

Overview

Days Sales Outstanding (DSO) is a crucial liquidity ratio that indicates the average number of days it takes for a company to collect its accounts receivable. It reflects the efficiency of a company's credit and collection policies. A lower DSO generally suggests that a company is collecting its receivables quickly, which improves cash flow and reduces the risk of bad debts, while a high DSO might signal collection problems or overly lenient credit terms.

Symbols

Variables

\text{AAR} = Average Accounts Receivable, \text{ACS} = Annual Credit Sales

Average Accounts Receivable
$
Annual Credit Sales
$

Apply it well

When To Use

When to use: Apply this formula to assess the effectiveness of a company's credit and collection management. It's particularly useful for monitoring changes in collection efficiency over time and comparing a company's performance against industry benchmarks.

Why it matters: DSO is vital for managing working capital and cash flow. Efficient collection of receivables ensures a steady inflow of cash, which is essential for meeting operational expenses and investing in growth. Poor DSO can lead to liquidity issues, increased borrowing costs, and potential write-offs of uncollectible accounts.

Avoid these traps

Common Mistakes

  • Using total annual sales instead of only annual credit sales, which can artificially lower the DSO.
  • Not using average accounts receivable, which can skew the result if receivables fluctuate significantly.

One free problem

Practice Problem

A company has Average Accounts Receivable of $300,000 and Annual Credit Sales of $3,650,000. Calculate the Days Sales Outstanding (DSO).

Average Accounts Receivable300000
Annual Credit Sales3650000

Solve for: DSO

Hint: Multiply the ratio by 365 days.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe (12th Edition)
  2. Financial Accounting for MBAs by Peter D. Easton, John J. Wild, Robert F. Halsey, Mary Lea McAnally (8th Edition)
  3. Wikipedia: Days Sales Outstanding
  4. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting (11th ed.). John Wiley & Sons.
  5. Ross, S. A., Westerfield, R. W., & Jaffe, J. F. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  6. Wikipedia article "Days sales outstanding
  7. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting (10th ed.). John Wiley & Sons.
  8. Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe (Chapter on Working Capital Management)