DSO is a measure of the average number of days it takes for a company to collect payments after a sale has been made. In other words, it's the amount of time it takes for a company to convert its accounts receivable into cash.
DSO is an important metric for businesses as it indicates how quickly they are able to collect payments from their customers. A high DSO can indicate that a company is experiencing cash flow issues, while a low DSO indicates that a company is able to collect payments quickly and efficiently.
A high DSO can also lead to a strain on a company's working capital, as cash is tied up in accounts receivable for longer periods of time. This can make it difficult for a company to pay its bills and meet its financial obligations in a timely manner.
To calculate DSO, divide the accounts receivable balance by the total credit sales for a given period, and then multiply that number by the number of days in that period. The formula for calculating DSO is:
DSO = (Accounts Receivable / Total Credit Sales) x Number of Days in Period
For example, if a company has $100,000 in accounts receivable and $500,000 in total credit sales for a 30-day period, the DSO would be:
DSO = ($100,000 / $500,000) x 30 = 6 days
This means that it takes the company an average of 6 days to collect payment from its customers after a sale has been made.