Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes for a company to collect payment after a sale has been made. DSO is a key indicator of a company’s accounts receivable management efficiency. The formula for calculating Days Sales Outstanding is:

\[ \text{Days Sales Outstanding (DSO)} = \left( \frac{\text{Accounts Receivable}}{\text{Net Credit Sales} / \text{Number of Days}} \right) \]

Here’s a breakdown of the components:

1. **Accounts Receivable:** The total amount of money that customers owe to a company for goods or services that have been sold on credit.

2. **Net Credit Sales:** The total sales made on credit (i.e., sales not involving immediate payment) during a specific period, minus any returns or allowances.

3. **Number of Days:** The time period over which the calculation is performed. This is typically the average number of days in the accounting period (e.g., 365 days for a year or 30 days for a month).

A lower DSO is generally considered favorable, as it indicates that a company is collecting payments from its customers more quickly. This, in turn, can improve cash flow and reduce the risk of bad debts.

Conversely, a higher DSO suggests that a company takes a longer time to collect payments, which may negatively impact cash flow and increase the risk of overdue accounts. Monitoring DSO is crucial for companies to ensure that their credit and collection policies are effective and that they are managing their accounts receivable efficiently.

DSO is often used in conjunction with other working capital metrics, such as Days Payable Outstanding (DPO) and Inventory Days, to assess a company’s overall cash conversion cycle and working capital efficiency. It’s important to consider industry benchmarks and the company’s specific circumstances when interpreting DSO, as optimal DSO can vary across different industries and business models.