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Days Sales Outstanding (DSO) is one of the most common performance metrics used to determine the effectiveness of receivable management. This measure, however, is more a measure of efficiency -- how quickly receivables are collected -- than effectiveness, which looks at the quality of the collection process itself.
DSO is important as a financial indicator to the extent that it shows the age, in terms of days, of an organization's accounts receivable and the average time it takes to turn receivables into cash.
It can give insight into the changes that occur within an organization's receivable balance. Indicating whether a change occurred because of a positive or negative fluctuation in sales during that period, or if other business factors such as promotional discounts, seasonality, selling terms, etc. created the effect.
DSO can vary significantly over the course of a year. The best use of this key performance indicator is as a measure of efficiency of the A/R process, indicating length of an organization's operating cycle.
In general, if your company's DSO is no more than 10-15 days longer than terms of sale, the receivables are turning into cash without much difficulty.
The most common calculation:
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