jhg, DSO is days' sales outstanding. It is the ratio of A/R to Sales times the number of days in accounting period, and is expressed in days. Example, Dell has A/R of $1,800 MM, and Sales of $4,331. Assume 91 days in the period. Therefore DSO = (1800/4331)*91 = 37.8 days.
This means that on average for the period it takes 37.8 days for Dell to receive payment from a customer.
Important caveat ==> All other things being equal, a growth company will have a higher DSO than a company with flat sales. That's why the CCC cycle is so important in fueling growth.
Example: Suppose a company is growing sales by 8% per month, so its sales pattern looks like this: $100, 108, 116.64 Now suppose that it receives payment in exactly 30.5 days, so that at the end of the quarter A/R are 116.64. DSO will be 116.64(100+108+116.64)*91.5 = 32.88 days (which is higher than 30 days).
TTFN,
CTC |
