Days Sales Outstanding (DSO): What’s the Point in Modeling & Valuation?

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Files & Resources for This Video:
breakingintowallstreet.com/kb...
Table of Contents:
0:00 Introduction
0:48 The Short Answer
2:59 Part 1: Why DSO is "Meh" for Big Companies
5:50 Part 2: Why DSO Can Be More Useful for Startups
9:44 Recap and Summary

[@financialmodeling]

Files & Resources for This Video:
breakingintowallstreet.com/kb/financial-statement-analysis/days-sales-outstanding-dso/
Table of Contents:
0:00 Introduction
0:48 The Short Answer
2:59 Part 1: Why DSO is "Meh" for Big Companies
5:50 Part 2: Why DSO Can Be More Useful for Startups
9:44 Recap and Summary

[@akustik_prog1601]

The DSO formula must be adjusted to 1. Take out VAT from A/R since VAT is not included into revenue so comp shall be apple to apple;
2. The DSO based on 365 days is pointless whenever sales are significantly skewed at year-end for instance. So the DSO in this case shall be analyzed on a quarterly basis timeframe and/or used onlyfor year on year comparison for that given quarter.
Finally despite the above adjustments, DSO shall be used benchmarking only other companies within same industry since its absolute value has little significance. Think, for instance, a retail cash & carry outlet business model. So in my view the point is not large companies vs. SME's but how DSO metrics compare to its same industry peer group.

[@financialmodeling]

Thanks for adding that. These points are all true but go beyond the scope of this video, which was just a short introduction to this topic. In most high-level models, DSO is just not that useful due to these and other issues (and many companies do not even disclose VAT or the components of AR separately, so...).