Larger companies generally have more resources and a more established and efficient collections process. When comparing companies within the same industry, it’s also important to keep in mind their size. It could mean your company is taking too long to collect its receivables. The median DSO for steel manufacturers in the US might be different from the one in China.Ī DSO that gets higher – relative to its industry’s median – over time is generally not a good sign. Your geography also needs to be considered. And the railroad transportation industry’s is 31. Your DSO value should only be considered good (low) or bad (high) relative to your industry.įor example, a construction company’s DSO (80 days) might look high in comparison to a railroad transportation company’s DSO (55 days).īut perhaps the construction industry’s (median) average DSO is 82. DSOs are relative to industries and geographiesĪ DSO number means something different to each company, industry, and geography. For these situations, there are four main points that it is essential to consider. However, its usefulness decreases when you are discussing more specific situations. It holds when you are discussing this subject in very broad terms. How to determine how good or bad a DSO isĭSO calculations without context don’t tell the whole picture.įor example, on its own, the statement ‘ a high DSO is bad and a low DSO is good‘ is true. But if this mix changes over time, it will. If you have more cash sales, for example, an inaccurate DSO calculation might not have as big of a negative impact. This means they skew the days sales outstanding calculation when mixed with credit sales.ĭifferent companies also have different mixes of cash and credit sales revenue. Cash sales should not be.Ĭash sales essentially have a DSO of 0 because customers pay immediately. Only credit sales revenue should be included in your DSO calculation. Don’t include cash sales in the accounts receivable balance So, this company’s DSO is 50.5 days, i.e., it takes 50.5 days for it to convert its average accounts receivable into cash. So, calculating their DSO value should look like this: Example DSO calculation:Ī company’s total receivables for the first quarter (91 days) were 10,000 USD, and its total credit sales were 18,000 USD. And annually enables comparisons with other years. Quarterly is useful for comparing your company’s performance throughout the year and for the same period in different years. It can be measured monthly, though for some businesses this may be too short of a period to gain real insights. Which time period you choose for the final part of the equation (the ‘number of days in a given period’) is important.
0 Comments
Leave a Reply. |