Days’ sales

Definition

Days’ sales, also known as Days Sales Outstanding (DSO), measures the average number of days it takes a company to collect payment after a sale. It is an indicator of the efficiency of a company’s accounts receivable management.

5 Must Know Facts For Your Next Test

1. Days' sales is calculated by dividing accounts receivable by total credit sales and then multiplying by the number of days in the period.
2. A lower DSO indicates that a company is collecting payments quickly, which is generally positive for cash flow.
3. High DSO values may indicate inefficiencies in collections or issues with customer payment practices.
4. DSO can vary significantly by industry; comparing a company's DSO to industry benchmarks can provide additional context.
5. Improving DSO often involves tightening credit policies or improving collection processes.

Review Questions

• How is Days' Sales Outstanding (DSO) calculated?
• What does a lower DSO signify about a company's cash flow?
• Why might comparing DSO to industry benchmarks be useful?

Related terms

Accounts Receivable: Money owed to a company by its customers for goods or services delivered.

Credit Sales: Sales where payment is delayed and typically recorded as accounts receivable.

Operating Efficiency Ratios: Metrics used to measure how well a company uses its assets and liabilities internally.