We shared a reader feedback on ageing analysis.
Another important parameter to judge the health of your collections process is DSO computation and reporting. We shared a list of the collections processes in a post earlier, you can refer to by the link below.
DSO computation and reporting
What does DSO mean?
DSO is an abbreviation for “Days Sales Outstanding”. This stands for expressing the outstanding collections as the collections equivalent to average days of sales.
There are various ways to express this:
- DSO = accounts receivable / average sales per day
- DSO = accounts receivable / (annual sales / 365 days)
It is a calculation used by a company to estimate their average collection period.
Typically, days sales outstanding is calculated monthly. Days sales outstanding is considered an important tool in measuring liquidity. From a simplistic understanding, the lower this number is the better are the collection efforts, and a bigger number shows that either large credit periods are being offered or your client runs a risk of increasing his delinquencies.
Ideally, a firm which does only cash sales will have this number as a zero.
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