All about DSO: definition, calculation and importance
The cash flow of a company is an important pillar for its good functioning and its development. Good financial health is the result of good management of accounts receivable and accounts payable. To achieve this, the DSO is one of the essential elements to take into account. Find out in this content how to calculate DSO and why it is important.
What is DSO?
DSO is an acronym for Days Sales Outstanding. Given its importance in the life of a company, the dso calculation is an inalienable parameter. It is the average payment period or the time given to a customer to settle his debt. Thus, DSO is directly linked to the company's cash flow. However, it is not measured in dollars or any other currency. To calculate it, all you need to know is the number of days it takes to pay the customer.
Once determined, it allows you to know your attitude towards collecting payments. In other words, you will know if you are too lax or too rigid. In the first case, you may face financial shortfalls in your business. In the other case, it could slow down sales. It is therefore important to find the right balance. And this is done by calculating the DSO.
How to calculate DSO?
DSO is easily calculated using a simple formula. It is simply the product of the sum of the credit sales and the number of days. To find out the total credit sales, simply look at the accounts receivable and count. For the number of days, it can be a month or a year.
How important is DSO?
The DSO plays an important role in keeping a company's financial health in shape. First, it allows you to gauge the efficiency of the various accounts receivable operations. It is also essential for evaluating certain elements such as a company's cash flow or customer satisfaction. It also allows important decisions to be made in order to maintain the company in good financial health.