Days of Sales Outstanding (DSO) is the average number of days it takes a company to collect its accounts receivable. There are several different formula variations for the DSO. DSO can be calculated using the balance sheet method, the income statement method, the average DSO method, or the countback method.
The Balance Sheet DSO Method Formula is as follows:
DSO = (Accounts Receivable at End of Period / Net Credit Sales for the Period) X Number of Days in the Period
The Average DSO Method Formula is as follows:
DSO = (Average Accounts Receivable for Period / Net Credit Sales for the Period) X Number of Days in the Period
Example Average DSO Method
Company A wants to measure its DSO for the 30 days from June 1, 2023, to June 30, 2023. Company A’s relevant values for June 2023 are the following:
- Total sales are $1,000,000. Cash sales were $750,000, while credit sales were $250,000.
- The accounts receivable balance as of May 31, 2023 was $45,000.
- The accounts receivable balance as of June 30, 2023 was $78,000.
- Cash collections on accounts receivable in June 2023 totaled $217,000.
7.38 days = [((45,000 + 78,000) / 2) / 250,000] X 30 days
Company A’s DSO is 7 days.
Example Balance Sheet DSO Method
Company A wants to measure its DSO for the 30 days from June 1, 2023, to June 30, 2023. Company A’s relevant values for June 2023 are the following:
- Total sales are $1,000,000. Cash sales were $750,000, while credit sales were $250,000.
- The accounts receivable balance as of May 31, 2023 was $45,000.
- The accounts receivable balance as of June 30, 2023 was $78,000.
- Cash collections on accounts receivable in June 2023 totaled $217,000.
9.36 days = (78,000 / 250,000) X 30 days
Company A’s DSO is 9 days
Things to Remember
Generally, a lower DSO is better. Lower DSO means the company is collecting cash on its accounts receivable sooner rather than later. A company uses the DSO figure alongside the Accounts Receivable Turnover ratio to measure how well it’s managing the credit extended to customers.