Days Sales Outstanding

Days Sales Outstanding – DSO - or ‘Receivables Conversion Period’ refers to the number of days needed to collect on sales. Generally speaking, higher DSO ratio can indicate a customer base with credit problems and/or a company that is not very efficient in its collections activity. A low ratio may indicate the firm's credit policy is too rigorous, which may be hampering sales.

Higher DSO can also be an indication of inadequate analysis of applicants for open account credit terms. 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.

Due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again - ideally, to reinvest and make more sales. The DSO can be used to determine whether a company is trying to disguise weak sales, or is generally being ineffective at bringing money in.