What does a high Days Sales Outstanding (DSO) indicate about a company?

A high Days Sales Outstanding (DSO) indicates that a company is taking longer to collect payment from its customers after a sale has been made. This prolonged collection period can signal potential cash flow issues, as money that could be used for other operational expenses or investments is tied up in receivables.

When DSO is elevated, it suggests that customers are either delaying payments, which may point to financial difficulties on their part, or the company's credit terms and collection efforts are not effective. Cash flow is crucial for any business to maintain smooth operations, pay suppliers, and invest in growth opportunities. Therefore, a high DSO is often viewed with concern as it can signify that a company is not optimizing its cash management practices.

While collections efficiency, customer satisfaction, and inventory management are all important aspects of a business’s financial health, they are not directly indicated by a high DSO. In contrast, the strong correlation between DSO and cash flow challenges underscores why this answer is the most appropriate in this context.