What is
Days Sales Outstanding?
Days Sales Outstanding (DSO) is a financial metric that measures the average number of days a company takes to collect payment after a sale has been made. It is a key indicator of accounts receivable efficiency and cash flow health.
A low DSO means a company collects payments quickly, improving liquidity. A high DSO may indicate inefficiencies in credit policies, slow-paying customers, or potential cash flow problems.
How to Calculate DSO?
The Days Sales Outstanding formula is:
DSO = (Accounts Receivable / Total Credit Sales) × Number of Days
Example Calculation:
Accounts Receivable (AR): $50,000
Total Credit Sales (30 days): $150,000
DSO = (50,000/150,000) × 30 = 10 days
This means it takes the company 10 days on average to collect payments.
Why Is DSO Important?
DSO helps businesses:
- Monitor cash flow – Faster collections improve liquidity.
- Evaluate credit policies – High DSO may mean lax credit terms.
- Identify customer payment trends – Spot late payers early.
- Benchmark performance – Compare against industry standards.
What Is a Good DSO?
Lower DSO = Better (faster collections).
Industry standards vary:
Retail: 5-10 days (fast transactions)
B2B Services: 30-60 days (common net-30 terms)
Manufacturing: 45-90 days (longer payment cycles)
A DSO higher than industry norms signals inefficiencies.
How to Reduce DSO
& Improve Collections
1. Tighten Credit Policies
Conduct credit checks before extending terms.
Set clear payment terms (e.g., Net-15 instead of Net-30).
2. Automate Invoicing & Follow-Ups
Use invoice software to send reminders.
Offer early payment discounts (e.g., 2% off if paid in 10 days).
3. Improve Billing Accuracy
Avoid delayed payments due to invoice errors.
Send invoices immediately after delivery.
4. Penalize Late Payers
Charge late fees for overdue invoices.
Escalate to collections agencies if necessary.
5. Offer Multiple Payment Methods
Accept credit cards, ACH, PayPal for faster processing.
DSO vs. Other Financial Metrics
| Metric | Measures | Purpose |
|---|---|---|
| DSO | Avg. days to collect payment | Cash flow efficiency |
| DPO (Days Payable Outstanding) | Avg. days to pay suppliers | Vendor payment speed |
| DIO (Days Inventory Outstanding) | Avg. days to sell inventory | Inventory management |
FAQs
A high DSO suggests slow collections, which may lead to cash flow shortages. Possible causes:
Lenient credit terms
Inefficient collections process
Customers delaying payments
Yes. An extremely low DSO may mean overly strict credit policies, potentially losing customers who prefer flexible terms.
Higher DSO = tied-up cash in receivables, reducing available working capital.
