What does Days Sales Outstanding (DSO) measure?

Days Sales Outstanding (DSO) measures the time it takes for a company to collect payment after a sale has been made. This metric is vital for assessing a company’s efficiency in managing its accounts receivable. A lower DSO indicates that a company is collecting cash from its sales relatively quickly, which is essential for maintaining liquidity and operational stability.

Understanding DSO helps businesses monitor their cash flow and credit policies, determine how well they are managing collections, and assess the effectiveness of their invoicing processes. A prolonged DSO could signal inefficiencies or potential cash flow issues, prompting a company to better its collection efforts. Therefore, the measurement of the time from a sale to receiving payment is fundamental to financial management and operational efficiency.