BlackLine Home page BlackLine home page
Solutions
Solutions
Financial Close Management
Financial Close Management
Overview
Overview
Account Reconciliations
Account Reconciliations
Task Management
Task Management
Transaction Matching
Transaction Matching
Journal Entry
Journal Entry
Financial Reporting Analytics
Financial Reporting Analytics
Variance Analysis
Variance Analysis
Smart Close for SAP
Smart Close for SAP
Accounts Receivable Automation
Accounts Receivable Automation
Overview
Overview
Cash Application
Cash Application
Credit & Risk Management
Credit & Risk Management
Collections Management
Collections Management
Disputes & Deductions
Disputes & Deductions
Team & Task Management
Team & Task Management
AR Intelligence
AR Intelligence
Invoicing & Compliance
Invoicing & Compliance
Intercompany Financial Management
Intercompany Financial Management
Overview
Overview
Intercompany Non-Trade
Intercompany Non-Trade
Intercompany Balance & Resolve
Intercompany Balance & Resolve
Intercompany Net & Settle
Intercompany Net & Settle
By Organization Size
By Organization Size
Midsize Organizations
Midsize Organizations
Large Enterprises
Large Enterprises
By Industry
By Industry
Banking & Financial Services
Banking & Financial Services
Consumer Products & Services
Consumer Products & Services
Energy & Raw Materials
Energy & Raw Materials
Healthcare & Life Sciences
Healthcare & Life Sciences
Manufacturing
Manufacturing
Retail
Retail
Technology, Media & Communications
Technology, Media & Communications
See All Industries
By ERP
By ERP
SAP
SAP
Oracle
Oracle
Oracle NetSuite
Oracle NetSuite
Microsoft Dynamics
Microsoft Dynamics
See All ERPs
By Topic
By Topic
Environmental, Social, and Governance
Environmental, Social, and Governance
Recruiting & Retaining Top Talent
Recruiting & Retaining Top Talent
Enabling an ERP Transformation
Enabling an ERP Transformation
CFO & CIO Collaboration
CFO & CIO Collaboration
F&A Transformation
F&A Transformation
IPO Readiness
IPO Readiness
Mergers & Acquisitions
Mergers & Acquisitions
Revenue Cycle Optimization
Revenue Cycle Optimization
Regulatory Compliance
Regulatory Compliance
Customers
Customers
Customer Success
Success Stories
Success Stories
Community
Community
Services
Services
Overview
Overview
Professional Services
Professional Services
Training & Education
Training & Education
Customer Success
Customer Success
Transformation Services
Transformation Services
Global Support
Global Support
Resources
Resources
Events
Events
Upcoming Webinars
Upcoming Webinars
On-Demand Webinars
On-Demand Webinars
White Papers
White Papers
Blog
Blog
Accounting Glossary
Accounting Glossary
Developer Portal
Developer Portal
About
About
Company
Company
About BlackLine
About BlackLine
Leadership
Leadership
Diversity, Equity & Inclusion
Diversity, Equity & Inclusion
Environmental, Social & Governance
Environmental, Social & Governance
In the News
In the News
Press Releases
Press Releases
Investors
Investors
Awards & Recognition
Awards & Recognition
Careers
Careers
Partners
Partners
Consulting Alliances
Consulting Alliances
Solution Provider Partners
Solution Provider Partners
Software & Cloud Partners
Software & Cloud Partners
Business Process Outsourcers
Business Process Outsourcers
← Back to Glossary

Days Sales Outstanding

What Is Days Sales Outstanding?

Days Sales Outstanding (DSO) is an accounting metric that refers to the average number of days it takes a business to collect payment for products and services provided. DSO is generally taken as a measure of the business’s efficiency and its effectiveness at converting sales to actual revenue or cash.

The lower the DSO, the more efficiently the business is operating. It is especially applicable to the accounts receivable (AR) process, which is responsible for collecting payments owed to the business.

DSO is part of a larger collection of metrics that reflects on the business’s overall effectiveness at converting cash to even more cash. Collectively, this is referred to as the cash conversion cycle (CCC). The CCC calculates the net aggregate time along three stages.

  • The first measure, Days Inventory Outstanding (DIO), quantifies how long it takes for a business to convert inventory that it has purchased into sales

  • The second metric is the DSO

  • Finally, the Days Payables Outstanding (DPO) measures how long it takes for the business to pay off its own purchases

A lower CCC number indicates that the business is efficiently converting initial cash into more cash. In other words, it is effectively converting its initial investment into revenue.

By itself, the DSO is an important metric because all businesses need cash to function. A business must meet its payroll obligations; pay utilities, rent, and overhead; purchase additional supplies and inventory; and pay down loans and other debt. Without cash, the business cannot meet these obligations and will have trouble functioning. Converting sales to cash supports ongoing business operations.

It reflects effective management, and in particular, a functioning accounts receivable department.

Examined more closely, DSO reflects not just on the way a business collects its accounts receivable. It also reflects on how the business manages the credit that it extends to customers. All businesses have a choice to makes sales for cash or credit. Ideally, all sales will be made in cash, and the business will have a steady infusion of cash to support its ongoing payment obligations.

In the real world, many customers want and need to make purchases on credit, and it is a good practice for the business to extend credit. This builds trust and good will with customers, and it helps generate more business. However, poorly managed credit can lead to a higher DSO.

If it takes too long for the business to convert sales to cash, this may be an indication that the business is being too lenient with the extension of credit and its cash conversion its suffering. Ideally, the business will want to extend credit while still maintaining a low DSO.

How Is the Days Sales Outstanding Calculated?

The DSO is calculated simply as the value of the accounts receivable divided by the total number of sales on credit, then multiplied by the number of days. The equation is represented mathematically as:

(Accounts Receivable ÷ Credit Sales) X Number of Days = DSO

In this manner, the DSO is essentially a representation of the total amount of payments to be collected as a proportion of the total amount of credit that has been extended over time.

The product represents an average for the time it takes during the accounting period for accounts receivable, or credit sales, to be collected.

In this equation, the number of days represents the number of days in the accounting period. The figure for accounts receivable can be either the total ending value for the accounting period or an average for the period.

In the case of an average, the accounts receivable would be calculated as the beginning balance plus the ending balance, then divided by two:

(Beginning Accounts Receivable + Ending Accounts Receivable) ÷ 2

FAQ

Why Is DSO Important?

DSO is an important metric of the efficiency of a business. It reflects on the performance of management and accounting staff. A business that is effectively converting sales to cash is generally considered a well-run business.

In What Context Is DSO Used?

DSO is an important metric for management as well as investors. A business that effectively converts sales to cash will more likely be able to meet its payment obligations and continue to grow. A low DSO is an indicator to management that things are running smoothly.

Investors and lenders may also consider the DSO, along with many other metrics, to determine if the business is viable as an investment or for a loan. A business with a low DSO has the potential for a good return on investment. Likewise, a business with a low DSO will have sufficient cash to repay a loan.

What Is an Example of DSO?

If a company made $100,000 in credit sales for the month, and $50,000 of those sales were in accounts receivable because they had not yet been paid, the DSO would be calculated as follows:

Step 1: $75,000 ÷ $100,000 = .75

Step 2: .75 X 30 (days in the month) = 22.5

The DSO in this example is 22.5, which means that it takes an average of 22.5 days for accounts receivable to be collected.

What Is Considered a Low or High DSO?

There is no universal standard for a “good” DSO. What is accepted as a good DSO varies from one type of business to another. The nature of the business and the industry it operates in reflects how quickly a business can be reasonably expected to convert sales to cash.

For example, businesses in the food and retail industries are less likely to extend credit to customers. They would be expected to have a low DSO, perhaps in the range of 20.

Other industries, such as construction and development, which are highly leveraged on financing, can be expected to have a much higher DSO, up to and exceeding 80.

Differences in industries notwithstanding, as a general rule, a good DSO is considered to be anything below 45.

Cash Application with BlackLine

Request a demo and speed up your cash application process using accounts receivable automation to instantly match customer payments to invoices and reduce unapplied cash by up to 99%.