In the world we live in today, many businesses serve all sorts of purposes. Some of them are financially-inclined, while some of them have objectives to provide more than a mere service. They may seek to change the world for the better with their service. From the surface, you may think they’re all quite different.
While that may be true, there are some qualities common to all businesses. One of these qualities is the processes that go on in these businesses, such as the production, processing, and distribution of goods and services.
That said, day sales outstanding or known as day sales outstanding is another common element of these businesses. As a company, you need to understand what this concept means and how it helps a business. Luckily, you can learn all about that today.
An Useful Guide to Sales Days Outstanding or (Day Sales Outstanding)
Many individuals seek a useful guide to day sales outstanding. It makes sense because they want to optimize their business and succeed.
This concept is relatively simple to understand. Frankly put, it is the number of days a company has to wait for before collecting the payment for a sale. The company and payment service determine this, and it is determined on a daily, monthly, quarterly, or even annual basis.
A company needs to get its account receivables to sustain an adequate cash flow as soon as possible. This is a significant reason why this metric is critical. If you want to get the accurate day’s sales outstanding number, you must approach it in this manner.
The number of accounts receivables should be divided by the total value of credit sales in a particular period. When that is done, multiply your result by the number of days in the period you’re measuring.
The formula above is an effective way of getting your day sales outstanding. That said, the result you get tells you essential facts about your company.
What This Important Metric Tells Your Company
Here is how you can read this metric and find out how it matters to your company.
What a high number tells you
A high DSO number isn’t good news to hear, no matter what type of business you run. Simply put, a day sales outstanding number tells you that your company is intentionally or unintentionally selling its product to its customers on credit.
Naturally, this also means that you would wait a long time before your company gets the money. If you leave this as is, it would eventually lead to many problems with cash flow.
Hence, you should try as much as possible to correct this dynamic. Doing so may not immediately turn things around for your company, but it is very influential in your company’s success.
What a low number tells you
On the other hand, a low number tells you that your business will wait fewer days to collect money from its customers. This is excellent news for your company, as it means that you would be able to maintain a steady cash flow. Over time, it would allow you to get the money you need to grow your business.
What We Think
There are many reasons to integrate day sales outstanding into your business, and this article has explained why. If you have a high DSO number, make sure you correct this anomaly as soon as possible. Otherwise, you risk jeopardizing the progress of your company.
