# Defining days of pending sales (DSO)

By Mark Holland / last month

## What are days of pending sales (DSO)?

Days of Sales Pending (DSO) is a measure of the average number of days it takes for a business to collect payment for a sale. The DSO is often determined on a monthly, quarterly, or annual basis.

The formula for days of pending sales is as follows: Divide the total number of accounts receivable during a given period by the total value of sales on credit during the same period and multiply the result by the number of days in the period to be is measuring.

Pending sales days are an element of the cash conversion cycle and can also be referred to as accounts receivable days or average collection period.

## Understanding Hot Day Sales

Given the vital importance of cash flow in running a business, it is best for a business to collect its outstanding accounts receivable as soon as possible. Businesses can expect with relative certainty that their outstanding accounts receivable will, in fact, be paid. But, due to the principle of the time value of money, the time spent waiting to be paid is money wasted.

By quickly converting sales to cash, a business has the opportunity to get cash back to use more quickly.

That said, the definition of “quickly” depends on the business. In the financial industry, relatively long payment terms are common. In the agriculture and fuel industries, prompt payment can be crucial. In general, small companies depend more on stable cash flow than large, diversified ones.

### What the numbers tell you

A high DSO number shows that a company is selling its product to customers on credit and waiting a long time to collect money. This can lead to cash flow problems. A low DSO value means that a business takes fewer days to collect its accounts receivable. That company is quickly getting the money it needs to create new businesses.

Indeed, determining the average time that a business’s outstanding balances are carried in accounts receivable can reveal a great deal about the nature of the business’s cash flow.

It is important to remember that the formula for calculating the DSO only takes into account sales on credit. Although cash sales can be considered to have a DSO of 0, they are not included in the DSO calculations. If they were taken into account in the calculation, the DSO would decrease, and companies with a high proportion of cash sales would have lower DSOs than those with a high proportion of credit sales.

## Days Sales Outstanding Applications

Days pending sales can be analyzed in a number of ways. It suggests how efficient the company’s collections department is and the degree to which the company maintains customer satisfaction. It also helps to identify clients who are not creditworthy.

Looking at a DSO value for a business over a single period can provide a good benchmark for quickly assessing a business’s cash flow. However, trends in DSO over time are much more useful. They can act as an early warning sign of trouble.

### Good and bad DSO numbers

If a company’s DSO is increasing, it is a warning sign that something is wrong. Customer satisfaction may be declining or sellers may be offering longer payment terms to drive increased sales. Or the business may allow low-credit customers to make purchases on credit.

A sharp increase in DSO can cause serious cash flow problems for a business. If a business’s ability to make its own payments in a timely manner is disrupted, it may be forced to make drastic changes.

Typically, when looking at the cash flow of a given company, it is helpful to track that company’s DSO over time to determine if its DSO is trending up or down or if there are patterns in history of the company’s cash flow.

The DSO can constantly vary on a monthly basis, especially if the company’s product is seasonal. If a business has a volatile DSO, this can be cause for concern, but if its DSO regularly drops during a particular season each year, it might not be a cause for concern.

## Example of pending sales days

As a hypothetical example, suppose that during the month of July, Company A made a total of $500,000 in credit sales and had$ 350,000 in accounts receivable. There are 31 days in July, so Company A’s DSO for July can be calculated as: