Account Receivable Assessment Tool – “DSO”
Written by Andy Li CM MCCMA
“DSO” stands for “Days Sales Outstanding” and it is a company’s average collection period. Typically, DSO is calculated monthly. A lower number of days indicated that the company collects it outstanding receivables quickly.
The equation is:
ABC Limited presented their AR Aging Report as at September 30, 2xx8. What is their “DSO”?
Age Bucket |
Dollars in Bucket |
Credit Sales in Period |
Current |
$3,000.00 |
$6,000.00 |
1-30 days past due |
$3,000.00 |
$7,000.00 |
31-60 days past due |
$2,000.00 |
$8,000.00 |
Total AR |
$8,000.00 |
$21,000.00 |
It shows us the relationship between outstanding receivables and sales achieved over a given period. We can compare the result with local industrial benchmark to evaluate the company’s performance. It is an important tool in measuring liquidity. Higher DSO can be an indication of poor follow up on delinquencies. An increase in DSO can result in cash flow problems, and may result in a decision to increase the creditor company’s bad debt reserve.
