What does DSO measure?

What does DSO measure?

• A. Days Sales Outstanding; cash conversion cycle
• B. Days Sales Outstanding; payables period
• C. Days Sales Outstanding; inventory turnover
• D. Days Sales Outstanding; average collection period

Answer: (B)

DSO measures the average time to collect payment from customers after a sale. It shows how quickly a company converts its credit sales into cash. A higher DSO means collections are slower and more cash is tied up in receivables. The term that describes this same idea is the average collection period, so the best pairing is DSO with average collection period. The payables period, by contrast, concerns how long the company takes to pay suppliers (days payable outstanding), not how long customers take to pay. The cash conversion cycle uses DSO together with other timing measures, but the essential point is that DSO reflects the average collection period.

DSO measures the average time to collect payment from customers after a sale. It shows how quickly a company converts its credit sales into cash. A higher DSO means collections are slower and more cash is tied up in receivables. The term that describes this same idea is the average collection period, so the best pairing is DSO with average collection period. The payables period, by contrast, concerns how long the company takes to pay suppliers (days payable outstanding), not how long customers take to pay. The cash conversion cycle uses DSO together with other timing measures, but the essential point is that DSO reflects the average collection period.