What you need to know about DSO
DSO, also known as Day Sales Outstanding, is a financial term that is related to debt collection. The DSO is a term that corresponds exactly to the average collection time or payment time called DMP in French that a company undergoes. This is the time between the date of issue of a customer invoice and its collection on time or late.
The importance of DSO
Cash flow is a very important issue for companies. This cash flow is greatly affected by the Working Capital Requirement (WCR) of which the DSO is an essential component or a software for accounts receivable. When your DSO is low, it automatically implies that you collect faster. This means you have a lot of cash available. Otherwise, the higher your DSO, the more you jeopardize your operation because your company will run out of cash.
The DSO is actually one of the levers to play on your Working Capital Requirement. The DSO is also an essential element in the calculation of your working capital requirement, as well as the inventory and the supplier payment terms, which are also essential elements.
How to calculate DSO?
To calculate the DSO, you can use several methods. However, the best known is the balance sheet or accounting method of calculating DSO. Very often, financial analysts and accountants only have the situation at the end of the fiscal year of a company.
Therefore, they use general data such as sales including VAT and the amount of trade receivables. In this case, in the balance sheet approach, the formula for calculating DSO is as follows
DSO = DPM = Accounts receivable / Sales including VAT X 365
(APD = Average Payment Period)
However, it is important to know that this method of calculating DSO does not take into account the problems of seasonality that many companies experience.