How do you calculate Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes a company to collect payment after a sale has been made. The correct method to calculate DSO is by dividing accounts receivable by average daily sales. This formula provides insight into how efficiently a company is managing its accounts receivable and collecting payments from customers.

To elaborate, when accounts receivable is divided by average daily sales, it yields the average number of days it takes to collect accounts due. Average daily sales are calculated by taking total sales over a specified period (usually a year) and dividing it by the number of days in that period. Thus, this calculation helps businesses understand their cash flow situation and manage their credit policies effectively. A lower DSO indicates a quicker collection period, which can positively impact the company's liquidity and financial health.