How do you calculate DSO (Days Outstanding)?
"DSO is often determined on a monthly, quarterly, or annual basis, and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured. This is a metric allowing companies to gauge how fast cash flow will be coming in."
"Days Sales Outstanding (DSO) is a widely used method to help evaluate how effective a company is at collecting receivables. DSO has always been an emphasis for all companies I've worked with and is calculated by dividing total accounts receivable by total sales and multiplying by number of days.
There is much to know about measuring and interpreting DSO:
1. A low DSO indicates the company is collecting receivables quickly and is generally a positive sign.
2. A high DSO proves that a company takes longer to collect on credit sales and can indicate current or impending cash flow problems, operational issues, or a lack of effort or focus on credit collections. A healthy DSO is one that is half the payment terms. For example, if payment terms are net 30 and the DSO is 45 day, then this considered good."
For this question, the interviewer is looking for the interviewee to be familiar with DSO or Days Outstanding. If you don't know what the acronym stands, for then don't be afraid to ask the interviewee.
DSO or Days Outstanding and is a measure of the average number of days it takes a company to collect payment after a sale has been made. This is a very important metric in Accounts Receivable.
DSO Total Accounts Receivable/Total Sales x Number of Days.
"To calculate days outstanding, take account receivable and divide by total sales, then multiply it by number of days. You can do this by individual account or by total accounts in outstanding."
