DSO stands for "Days Sales Outstanding".
DSO is the average number of days for your business between 1/ invoice issuance, and 2/payment received. In simple words, it’s the time it takes to your business to get paid by your users. It’s usually measured in a number of days.
There are different methodologies on how to calculate your DSO and we have chosen the countback method.
The idea of the countback method is moving backwards in time, by subtracting the revenues posted each month against the initial stock of accounts receivables you have, until there’s no more left.
Let’s look into an example.
Let’s assume we’re on the 30th of November 2020 and we’d like to compute the DSO.
We have $2,500 of unpaid invoices (receivables) on that day and the monthly revenues for the previous month were as reported in the table below:
Step 1: As of November 30, the amount outstanding was $2,500. Because we have more receivables ($2500) than turnover ($1200) for November, we start by subtracting $1,200 recorded in revenues for the month. We move back to 31st of October with:
- A stock of “counted back” receivables decreasing to $2,500 - $1,200 = $1,300.
- 30 days DSO contribution (the whole month of November)
Step 2: We’re back on 31 October. There’s still more receivables ($1,300) than revenues for the month ($800). Same process as before. We move back to September 30 with
- A stock of receivables decreasing to $1,300 - $800 = $500
- 31 days DSO contribution (the whole month of October)
Step 3: We’re back on 30 September. This time, the revenues for the month ($700) are higher than the remaining stock of receivables ($500).
- Here, we’ll contribute the prorata of DSO (500/700) * 30 = 21.4 days
- There’s no more stock of receivables, we’ve gone through the end of the countback process.
In total, the DSO would then be 30 days + 31 days + 21.4 days = 82.4 days
Here is the table summarizing the steps:
- If your business is growing, sales’ seasonality is taken into account with this method;
- You can calculate your DSO at any given time, without having to wait for the end of the month. It’s better if you’re tracking DSO and your cash collection on a daily basis.
- This method is much more complex to use and requires a sophisticated formula. It’s probably better to find the right tool to compute it for you.
We'd love to hear your feedback on your DSO calculations! Drop us a line at [email protected]