What is DSO (Day Sales Outstanding)? Please explain in detail with example.

DSO, or Days Sales Outstanding, is a financial metric that measures the average number of days it takes a business to collect payment from its customers. It is used to assess the efficiency of a business's accounts receivable process and its ability to manage its cash flow. The formula for calculating DSO is:

DSO = (Accounts Receivable / (Net Credit Sales / 365))

For example, let's say a business has $100,000 in accounts receivable and $500,000 in net credit sales for the year. To calculate DSO, we divide the accounts receivable by the net credit sales, and then divide that number by 365 (the number of days in a year).

DSO = ($100,000 / ($500,000 / 365)) = (100,000 / (1,370)) = 73 days

In this example, the DSO is 73 days, which means that on average, it takes the business 73 days to collect payment from its customers. A lower DSO indicates that the business is collecting payment more quickly and efficiently, while a higher DSO indicates that the business may have issues with its accounts receivable process.

It's important to note that DSO can vary depending on the industry, and it's a good idea to compare a company's DSO with its industry's averages to understand how it's performing.

DSO is an important metric for businesses to monitor because it can provide insight into the efficiency of their accounts receivable process. A high DSO may indicate that the business is having trouble

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