Ever listen to an earnings release, and hear a company's executives spout out numbers on DSO? What does DSO mean?
DSO stands for days sales outstanding or the average collection period. It is calculated by dividing the average accounts receivables by the average daily sales. The figure indicates a company's success in collecting amounts due from customers.
A low DSO may mean that a company is collecting its outstanding receivables quickly, and if a company's DSO is consistently low, it may mean that the company's collections have become more efficient.
However, because DSO only measures the time and efficiency of collections, it does not tell the whole story on whether a credit department is successful. For instance, DSO does not include information on credit terms or sales incentives.
The DSO should be compared with other figures such as the average days deliquent (ADD) number to determine whether collections is really the main determinant of credit improvement. When reviewing the DSO with the ADD, a rise in DSO may not be from more efficient collections, but shorter payment periods or changes in credit terms.
The DSO is usually closely tracked by analysts, auditors, and CFOs. Reducing the DSO may contribute to cash flow, allowing for investments back into a company for inventory or other acquisitions.
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