Want to understand Days Sales Outstanding (DSO) and how to calculate it in Excel? You're in the right place! This post offers a comprehensive overview of DSO and guides you through the Excel calculation to simplify this crucial metric.
What is Days Sales Outstanding (DSO)?
DSO measures the average number of days a company needs to collect payment from outstanding invoices. It's a pivotal metric that indicates the speed at which a company converts sales into cash. Calculating DSO can help gauge the efficiency of a company's accounts receivable process and highlight potential delays in customer payments.
For stock investments, this metric reveals a company's financial health. A high DSO indicates customers are paying more slowly, possibly pointing to cash flow issues. Conversely, a low DSO implies prompt payments, suggesting a healthy accounts receivable.
How to Calculate Days Sales Outstanding
Now that you grasp DSO's significance, let's dive into its calculation. It's straightforward: divide total average receivables by total sales and multiply by 365 days:
DSO = (Accounts Receivable / Total Sales) x 365 Days
Take Apple in 2018, for instance: with accounts receivable average at $42.3 billion and sales at $265.6 billion, the DSO is:
DSO = ($42.3 Billion / $265.6 Billion) x 365 Days = 58 Days
This figure means Apple took 58 days on average to collect payment from its invoices in 2018.
Days Sales Outstanding Excel Calculation
With the formula in hand, let's craft an Excel calculation:
- Create a new worksheet and input your Accounts Receivable Average and Total Sales in two columns.
- In the third column, insert the formula = (Accounts Receivable / Total Sales) x 365.
- Compute the average DSO for your desired period (e.g., year-to-date, last quarter).
- Format the cell to show DSO in days.
- Save your worksheet, and you're set!
Automatic Calculation
Manually calculating DSO for multiple companies becomes tedious. That's where tools like Wisesheets come in, allowing you to simultaneously compare financials and key metrics for hundreds of companies.
With Wisesheets, you can automatically compute DSO for many companies, gain insights, and rapidly analyze each company's performance. This tool lets you contrast metrics across industries, which is essential for informed investment decisions.
What's a Good Days Sales Outstanding Number?
The answer to this question depends on your business and industry. Generally, a good DSO number is one that is lower than the industry average. This means that customers are paying quickly, suggesting an efficient accounts receivable process and positive cash flow. A higher-than-average DSO indicates potential delays in customer payments, which could lead to cash flow problems.
It is important to remember that a good DSO number is not necessarily better than a bad one. Depending on the industry, companies may have different payment terms, and collecting payments quickly may be difficult or impossible. The key is to understand what’s considered normal in your particular industry so you can benchmark your performance against other players.
One source of industry benchmarks for DSO is the U.S. Accounts Receivable and Days Sales Outstanding Industry Report from Dun & Bradstreet and the Credit Research Foundation. This report provides quarterly data on the percentage of receivables that are current, up to 30 days late, 30-60 days late, 60-90 days late, and 91+ days late for various industries based on the Standard Industrial Classification (SIC) code system. The report also lists the top 15 industries that have the highest percentage of severely delinquent (91+ days late) receivables.
According to the Q1 2023 report, some of the industries with the lowest average DSO are:
- Tobacco Products (SIC code 21): 9 days
- Wholesale Trade-non-durable Goods (SIC code 51): 30 days
- Petroleum Refining And Related Industries (SIC code 29): 35 days
- Food And Kindred Products (SIC code 20): 34 days
- Transportation By Air (SIC code 45): 37 days
Some of the industries with the highest average DSO are:
- Nonresidential construction (SIC code 1542): 152 days
- Construction – General Contractors & Operative Builders (SIC code 15): 151 days
- Miscellaneous repair services (SIC code 76): 139 days
- Repair services (SIC code 7699): 138 days
- Ret computers/software (SIC code 5734): 133 days
Impact of Digital Transformation on DSO
Digital transformation is reshaping business facets, including accounts receivable. Companies use technology to positively affect their DSO in various ways:
- Automated Invoicing and Collections: Today's invoicing software automatically dispatches invoices, reminders, and alerts. This reduces errors, speeds up billing, and can cut down payment delays.
- AI-Powered Predictive Analysis: By examining client payment histories, Advanced AI tools predict potential payment delays or defaults. This data helps companies adopt measures like changing payment terms or enhancing credit policies.
- Real-time Reporting: Modern platforms offer immediate reporting and dashboards, allowing companies to see their outstanding receivables at a glance, aiding swift decision-making.
- Digital Payment Options: Emerging digital payment methods ensure diverse client options, streamlining transactions.
- Blockchain and Smart Contracts: Technologies like blockchain enable smart contracts that auto-execute upon meeting certain conditions, such as product delivery.
- Enhanced Customer Experience: Today's interactive portals let customers access transaction histories, raise invoice disputes, or communicate, ensuring swifter resolutions.
Embracing digital transformation not only improves a company's DSO but can also provide a competitive edge through operational efficiency and customer satisfaction.
Conclusion
DSO is a crucial metric for financial analysis or investment decisions. While a low DSO generally implies efficient collection processes, viewing it in the context of industry norms is vital. Tools like Wisesheets can streamline DSO comparisons across companies. When evaluating DSO, aim for a comprehensive approach, factoring in industry benchmarks and trends for informed decisions.
Happy Investing!
