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 the money this can lead to cash flow problems a low dso value means that it takes a company fewer days to collect its accounts receivable that company is promptly getting the money it needs to create new business in effect determining the average length of time that a company s outstanding balances are carried in receivables can reveal a great deal about the nature of the company s cash flow it is important to remember that the formula for calculating dso only accounts for credit sales while cash sales may be considered to have a dso of 0 they are not factored into dso calculations if they were factored into the calculation they would decrease the dso and companies with a high proportion of cash sales would have lower dsos than those with a high proportion of credit sales applications of days sales outstandingdays sales outstanding can be analyzed in a wide variety of ways it suggests how efficient the company s collections department is and the degree to which the company is maintaining customer satisfaction it also helps identify customers who are not creditworthy looking at a dso value for a company for a single period can provide a good benchmark for quickly assessing a company 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 numbersif a company s dso is increasing it s a warning sign that something is wrong customer satisfaction might be declining or the salespeople may be offering longer terms of payment to drive increased sales perhaps the company may be allowing customers with poor credit to make purchases on credit a sharp increase in dso can cause a company serious cash flow problems if a company s ability to make its own payments in a timely fashion is disrupted it may be forced to make drastic changes average dso for companies across various industries in the third quarter of 2022 2generally when looking at a given company s cash flow 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 the company s cash flow history dso may vary consistently on a monthly basis particularly if the company s product is seasonal if a company has a volatile dso this may be cause for concern but if its dso regularly dips during a particular season each year it could be no reason to worry limitations of days sales outstandingas a metric attempting to gauge the efficiency of a business days sales outstanding comes with a limitation that is important for any investor to consider 