{"id":27040,"date":"2023-12-12T22:14:22","date_gmt":"2023-12-13T03:14:22","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=27040"},"modified":"2024-08-14T06:46:08","modified_gmt":"2024-08-14T11:46:08","slug":"days-sales-outstanding-dso","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/days-sales-outstanding-dso\/","title":{"rendered":"Days Sales Outstanding (DSO) in Valuation and Financial Modeling"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Days Sales Outstanding (DSO) in Valuation and Financial Modeling<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/days-sales-outstanding-dso\/#Days_Sales_Outstanding_Definition\">Days Sales Outstanding Definition<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/days-sales-outstanding-dso\/#Days_Sales_Outstanding_in_Financial_Models_Why_Its_%E2%80%9CMeh%E2%80%9D_for_Most_Big_Companies\">Days Sales Outstanding in Financial Models: Why It&#8217;s &#8220;Meh&#8221; for Most Big Companies<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/days-sales-outstanding-dso\/#Days_Sales_Outstanding_for_Startups_and_Small_Businesses\">Days Sales Outstanding for Startups and Small Businesses<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/days-sales-outstanding-dso\/#How_to_Improve_Days_Sales_Outstanding\">How to Improve Days Sales Outstanding<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Days_Sales_Outstanding_Definition\"><\/span>Days Sales Outstanding Definition<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Days Sales Outstanding (DSO) is a financial metric measuring the average number of days it takes a company to collect customer payments in cash following sales.<\/p>\n<p>When companies sell products, they often deliver them to customers and accept cash payments later, such as within 30 or 60 days. This policy creates a \u201clag\u201d between\u00a0<strong>revenue<\/strong>\u00a0and\u00a0<strong>cash collected<\/strong>, which Days Sales Outstanding measures.<\/p>\n<p>You can calculate Days Sales Outstanding with this formula:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27041 size-full\" title=\"Days Sales Outstanding Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074642\/01-Days-Sales-Outstanding-Formula.jpg\" alt=\"Days Sales Outstanding Formula\" width=\"1448\" height=\"160\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074642\/01-Days-Sales-Outstanding-Formula.jpg 1448w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074642\/01-Days-Sales-Outstanding-Formula-300x33.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074642\/01-Days-Sales-Outstanding-Formula-1024x113.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074642\/01-Days-Sales-Outstanding-Formula-768x85.jpg 768w\" sizes=\"(max-width: 1448px) 100vw, 1448px\" \/><\/p>\n<p>For example, if Accounts Receivable is $100, Credit Sales are $400, and you\u2019re looking at an entire year:<\/p>\n<p><strong>DSO<\/strong> = ($100 \/ $400) * 365 = 91.25 days<\/p>\n<p>This means it takes the company about 3 months to collect cash from customers.<\/p>\n<p>A <strong>lower DSO<\/strong> implies a <strong>faster collection process<\/strong>, which is desirable since it ensures better cash flow.<\/p>\n<p>A <strong>higher DSO<\/strong> signals a <strong>slower collection process<\/strong>, which could point to inefficiencies or lenient credit terms, potentially tying up capital and impacting liquidity.<\/p>\n<p>In <a href=\"https:\/\/mergersandinquisitions.com\/financial-modeling\/\" target=\"_blank\" rel=\"noopener\">financial modeling<\/a>, the DSO metric and projecting Accounts Receivable with DSO tend to be the <strong>most useful<\/strong> for startups, small businesses, distressed companies, and any other firm with potential &#8220;cash flow issues.&#8221;<\/p>\n<p>The DSO metric is also a key component of the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/cash-conversion-cycle\/\" target=\"_blank\" rel=\"noopener\">Cash Conversion Cycle<\/a>, used in financial statement and credit analysis.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-03-Days-Sales-Outstanding-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Days Sales Outstanding (DSO) &#8211; Slides (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-03-Days-Sales-Outstanding-Example.xlsx\" target=\"_blank\" rel=\"noopener\">Monster Beverage &#8211; Sample 3-Statement Model with DSO (XL)<\/a><\/p>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<p><strong>0:48:<\/strong> The Short Answer(s)<br \/>\n<strong>2:59:<\/strong> Part 1: Why DSO is &#8220;Meh&#8221; for Big Companies<br \/>\n<strong>5:50:<\/strong> Part 2: Why DSO Can Be More Useful for Startups<br \/>\n<strong>9:44:<\/strong> Recap and Summary<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Days_Sales_Outstanding_in_Financial_Models_Why_Its_%E2%80%9CMeh%E2%80%9D_for_Most_Big_Companies\"><\/span>Days Sales Outstanding in Financial Models: Why It&#8217;s &#8220;Meh&#8221; for Most Big Companies<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The first issue is that most large public companies do not disclose Credit Sales vs. Cash Sales, so, in practice, all you can do is use Net Sales in the formula. It will look something like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27042 size-full\" title=\"Days Sales Outstanding (DSO) for Large Companies\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074641\/02-DSO-Formula-Large-Companies.jpg\" alt=\"Days Sales Outstanding (DSO) for Large Companies\" width=\"1444\" height=\"150\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074641\/02-DSO-Formula-Large-Companies.jpg 1444w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074641\/02-DSO-Formula-Large-Companies-300x31.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074641\/02-DSO-Formula-Large-Companies-1024x106.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074641\/02-DSO-Formula-Large-Companies-768x80.jpg 768w\" sizes=\"(max-width: 1444px) 100vw, 1444px\" \/><\/p>\n<p>The second issue is that DSO adds very little for most big companies because you can already tell if the Cash Collection Time is increasing just by looking at Accounts Receivable \/ Revenue.<\/p>\n<p>Here&#8217;s an example for Monster Beverage, taken from our <a href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\" rel=\"noopener\">Core Financial Modeling course<\/a>:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27043 size-full\" title=\"DSO for Monster Beverage Corporation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/03-DSO-Monster-Beverage.jpg\" alt=\"DSO for Monster Beverage Corporation\" width=\"1516\" height=\"624\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/03-DSO-Monster-Beverage.jpg 1516w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/03-DSO-Monster-Beverage-300x123.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/03-DSO-Monster-Beverage-1024x421.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/03-DSO-Monster-Beverage-768x316.jpg 768w\" sizes=\"(max-width: 1516px) 100vw, 1516px\" \/><\/p>\n<p>DSO here equals AR \/ Revenue * Days in Year.<\/p>\n<p>We can project the Accounts Receivable balance based on either AR \/ Revenue or DSO, but in either case, there&#8217;s a clear trend toward\u00a0<strong>increasing cash collection times.<\/strong><\/p>\n<p>No matter what we do, the AR balance keeps increasing over time, reducing the company&#8217;s cash flow since an increase in AR makes the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a> more negative:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27044 size-full\" title=\"Days Sales Outstanding to Project Accounts Receivable\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/04-DSO-for-AR-Projections.jpg\" alt=\"Days Sales Outstanding to Project Accounts Receivable\" width=\"1447\" height=\"440\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/04-DSO-for-AR-Projections.jpg 1447w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/04-DSO-for-AR-Projections-300x91.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/04-DSO-for-AR-Projections-1024x311.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074640\/04-DSO-for-AR-Projections-768x234.jpg 768w\" sizes=\"(max-width: 1447px) 100vw, 1447px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Days_Sales_Outstanding_for_Startups_and_Small_Businesses\"><\/span>Days Sales Outstanding for Startups and Small Businesses<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The DSO metric can be far more useful here because many of these firms have serious\u00a0<strong>cash-flow problems<\/strong>, such as difficulty invoicing customers or collecting cash.<\/p>\n<p>Also, many of these companies have specific policies about invoice payments, due dates, etc., and you can incorporate these dates into the model by linking them to Days Sales Outstanding.<\/p>\n<p>If a company&#8217;s DSO keeps worsening, it may be a sign that it needs to raise more capital than expected or that it needs to change its business policies.<\/p>\n<p>To illustrate, here&#8217;s an example of a SaaS company (Sapphire Wolf) taken from our <a href=\"https:\/\/breakingintowallstreet.com\/venture-capital-modeling\/\" target=\"_blank\" rel=\"noopener\">Venture Capital Course<\/a>.<\/p>\n<p>Initially, the company has 60-day collection times based on 2-year contracts with all upfront payments, which produces the following Cash and Accounts Receivable figures:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-27045\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074639\/05-DSO-Startup-60-Days.jpg\" alt=\"60 Day Collection Time for Startup - Cash and Accounts Receivable\" width=\"1519\" height=\"405\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074639\/05-DSO-Startup-60-Days.jpg 1519w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074639\/05-DSO-Startup-60-Days-300x80.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074639\/05-DSO-Startup-60-Days-1024x273.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074639\/05-DSO-Startup-60-Days-768x205.jpg 768w\" sizes=\"(max-width: 1519px) 100vw, 1519px\" \/><\/p>\n<p>However, if the DSO starts creeping up to 3-4-months over the years, the company&#8217;s cash flow, Cash, and AR all change substantially.<\/p>\n<p>We can simulate this outcome by modifying the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/\" target=\"_blank\" rel=\"noopener\">SaaS Billings<\/a> and AR schedule as follows, changing the percentages to reflect the number of months&#8217; worth of uncollected Billings at the end of each year:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27046 size-full\" title=\"Higher DSO, with Collection Days Increasing from 60 to ~105 Over Time\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074638\/06-Higher-DSO-for-Startup.jpg\" alt=\"Higher DSO, with Collection Days Increasing from 60 to ~105 Over Time\" width=\"1455\" height=\"433\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074638\/06-Higher-DSO-for-Startup.jpg 1455w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074638\/06-Higher-DSO-for-Startup-300x89.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074638\/06-Higher-DSO-for-Startup-1024x305.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074638\/06-Higher-DSO-for-Startup-768x229.jpg 768w\" sizes=\"(max-width: 1455px) 100vw, 1455px\" \/><\/p>\n<p>This change makes a\u00a0<em>huge<\/em> impact on the company&#8217;s Cash and AR balances, as they now change by ~$8 million by the end of the forecast period:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27047 size-full\" title=\"Days Sales Outstanding Impact on Cash and Accounts Receivable\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074637\/07-DSO-Impact-Cash-AR.jpg\" alt=\"Days Sales Outstanding Impact on Cash and Accounts Receivable\" width=\"1519\" height=\"401\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074637\/07-DSO-Impact-Cash-AR.jpg 1519w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074637\/07-DSO-Impact-Cash-AR-300x79.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074637\/07-DSO-Impact-Cash-AR-1024x270.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/12\/19074637\/07-DSO-Impact-Cash-AR-768x203.jpg 768w\" sizes=\"(max-width: 1519px) 100vw, 1519px\" \/><\/p>\n<p>So, if the Days Sales Outstanding starts &#8220;creeping up&#8221; like this for a small business or startup, the company might have to re-think its funding needs or change its business policies to encourage faster collection.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Improve_Days_Sales_Outstanding\"><\/span>How to Improve Days Sales Outstanding<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Many companies can <strong>optimize their cash flow<\/strong> by reducing their Days Sales Outstanding.<\/p>\n<p>There are a few ways to do this, depending on the company and industry:<\/p>\n<p><strong>1) Offer Incentives<\/strong> &#8211; For example, if a customer pays upfront in cash, they get a 10% discount or an offer to save on their next order or renewal. This can encourage faster payments and repeat purchases from customers.<\/p>\n<p><strong>2) Identify Problematic Customers<\/strong> &#8211; If some customers are consistently late making their payments, the company could identify them and impose stricter credit terms or additional conditions for doing business with them, such as higher upfront payments.<\/p>\n<p><strong>3) Limit Payment Terms<\/strong> &#8211; For example, a company could limit payment windows or installment plans for new or high-risk clients. Follow-up mechanisms, including timely reminders and assertive communication, can also ensure that payments don&#8217;t slip through the cracks.<\/p>\n<p>Because of how <a href=\"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/saas-accounting\/\" target=\"_blank\" rel=\"noopener\">SaaS billings and accounting<\/a> work, a software company implementing these strategies could see greatly improved cash flows and even a potentially higher valuation.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Days Sales Outstanding (DSO) is a financial metric measuring the average number of days it takes a company to collect customer payments in cash following sales.<\/p>\n<p>When companies sell products, they often deliver them to customers and accept cash payments later, such as within 30 or 60 days. This policy creates a \u201clag\u201d between\u00a0revenue\u00a0and\u00a0cash collected, which Days Sales Outstanding measures.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-27040","biws_kb","type-biws_kb","status-publish","hentry","kb_category-financial-statement-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/27040","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=27040"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}