Days Sales Outstanding (or DSO) essentially is the number of days of sales with outstanding payments within a particular period. It is that simple.
There are a lot of mistakes that come to play when talking about DSO. Some people may think that DSO is a measure of how long it will take to collect payments after making sales (or collecting payments for services rendered). Others believe that DSO is measured in monetary value.
But remember that daily sales outstanding does not have to be that complex. You can simplify by turning to aspects like this very useful guide to enhance your business knowledge.
These concepts can be of great importance as you seek to run or manage a business. Many people find that it can be very stressful to understand and implement but with a little patience and focus, you can easily comprehend what it is all about in your life.
Here is what you must know about this concept.
It is Essential To Clarify Mistakes With A Simple Useful Guide
Recall those mistakes that many people make? It is essential to clarify the two misconceptions as early as possible. A simple way to correct both errors is to understand that DSO deals with how many days (from when the transaction was initiated) to collect a debt owed.
For example, if a company or a business is owed $650,000 across all its branches or outlets or maybe even in just one branch, the DSO is $650,000 divided by the company’s average sales daily or monthly.
Maybe even yearly.
If the average sales for that company are $1,000 per day, then the $650,000 is divided by $1,000. That means that the company has six hundred and fifty (650) days worth of sales in outstanding payments.
Suppose the company’s financial officer decides to calculate the DSO of this company by the average company sales per month. In that case, it will be six hundred and fifty thousand dollars, divided by thirty thousand dollars (assuming that the company makes thirty thousand dollars every month on the average).
DSO is all about putting the company’s debt into how many days (or months) of sales it has in obligations or other forms of outstanding payments.
However, sales rise and fall, and sometimes sales average of companies and businesses night differ from month to month or day to day. And while those differences might be as small as a few cents or a couple of dollars, they can also be as extreme as a couple hundred thousand dollars and maybe even millions. The average amount of daily or monthly sales must reflect these differences when calculating DSO.
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The Concept Helps Businesses Understand Obligation Coverage Potential
DSO is a very useful metric for companies and small businesses in various ways. It matters when people are even making investments, too. This is not just because it lets them know how much they should expect to obtain, but also because it helps them understand their customer base and improve the consumer-producer relationship.
Credit-Oriented Economies
In credit-based economies, DSO shows how much the company is making against the money it is owed. It also helps the company know if its policies are too stringent on its customers and potentially drives them away.
Suppose the policy does drive consumers away, a company can relax its policies and give its customers a little more leeway on payments. This will then improve the company’s day sales when it witnesses an increase in customers. This primarily works for products whose prices are slightly on the high expense side or have many substitutes in the market from other companies. Or both.
Other Aspects of the Business Metric
However, in an economy that does not allow credit sales, this can mean a very different thing. A firm with a very high DSO will have money problems because a considerable percentage of its money will be held with customers.
It might even push the company to bankruptcy or closure.
If the company is already close to bankruptcy or closure, DSO can be an indicator and push them to make more sales or make tighter recovery policies. It can also be a way to anticipate how long a company has before it closes down.
It is a straightforward metric but can shine a light on the company’s health and even the economy’s health if one were to look at this data in aggregate.