DSO gives useful information about the health of the cash flow in your business. The formula can be applied to different lengths of time for comparing different aspects of your cash flow.
For example if your business is heavily seasonal, you may want to look at the DSO for a year rather than a quarter. The lower the number is, the better.The magic number to shoot for is 45. This can vary by industry, but for the most part, if you are right around 45 days on average, you’re doing well. If the number drops too low, you may be missing out on customers who are either unwilling or unable to meet your time requirements. If the number is much higher, you should probably look into your system for determining creditworthiness.
Trends over time are often more important than the actual number. An increasing trend can be the result of a change in your department’s credit scoring; which is resulting in people paying much later than is acceptable, or your customers may be becoming dissatisfied with your service, and are putting you at the bottom of their accounts payable list.
It’s all about a balance between giving as many people as possible access to your product, and making sure all those people can pay you. Your Days Sales Outstanding number can give you a good look at your current and past profitability.