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What does days sales outstanding in receivables measure?

The average time to collect receivables

Days sales outstanding (DSO) in receivables is a key performance indicator that measures the average time it takes a company to collect payment from its customers after a sale has been made. This metric provides insight into the efficiency of a company's credit and collection processes. A lower DSO indicates that the company is able to collect its receivables quickly, which is generally a sign of good cash flow management. Conversely, a higher DSO may suggest issues with credit policies or collection efforts.

To arrive at this metric, companies typically calculate it by taking the average accounts receivable for a period and dividing it by the average daily sales. This calculation helps businesses assess how effectively they are managing their receivables, thereby influencing overall liquidity and financial health.

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The total receivables divided by total sales

The number of days suppliers are paid

The total days in a year divided by AR turnover

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