Days Sales Outstanding (DSO) is a key metric commonly used in the eCommerce industry to analyze business performance. It measures the number of days it takes on average for a business to collect payments from customers who paid using credit and is expressed on an annual basis for easy comparability.
How to calculate DSO
DSO helps businesses analyze how effective or efficient their processes are in collecting cash from customers who paid on credit.
Cash is equivalent to oxygen for any company, and a lack of sufficient oxygen in the tank can lead to drowning. Every business wants to collect cash faster than it spends on payables, and hence it is crucial to constantly track DSO and put in efforts to reduce it.
A lower DSO indicates that the company is able to convert credit sales into cash relatively fast, resulting in more liquid cash available for payroll, purchasing, and investments.
A higher DSO indicates that the company is unable to quickly convert its credit sales into cash, resulting in less liquidity at hand.
So, as a general rule of thumb, a company strives to lower DSO, which clearly is an indicator of its highly efficient payment collection process.