Day’s Sales Outstanding, or DSO on its own is not taken by many Credit managers to be an accurate reflection of a successful credit management function. A textbook formula for calculating DSO is month-end balance divided by average daily credit sales. DSO can therefore be misleading if sales fluctuate, for example, if sales spike up, then DSO will statistically go down if the balance is the same as the previous month.
But, as the pay patterns of customers may not have changed, a credit manager must assess the deterioration of the outstanding sales and account for deductions and short pays as a percentage of a total sale.
Monthly figures are not a reliable indication of successful credit management, regardless of which indication is used. It is therefore advised to observe statistics on a rolling basis of 12 months to take in to account fluctuations in sales performance.
Like any Key Performance Indicator, DSO should not be used in isolation but balanced against other measurements.