Days sales outstanding (DSO)
The average number of days it takes a business to collect payment after making a sale on credit.
In short
- Lower DSO means cash arrives sooner.
- Compare it with your payment terms: DSO of 52 on net 30 terms means customers pay about 22 days late.
- It is one of the three parts of the cash conversion cycle.
DSO = Accounts receivable ÷ Credit sales × Days in period
Use ending or average receivables, consistently. For a quarter use 90 days; for a year, 365. Exclude cash sales, which never create receivables.
Days sales outstanding, or DSO, estimates how long customers take to pay. It relates the receivables balance to credit sales for the period and converts the result to days.
Reading DSO
DSO means most in relation to terms. If a business offers net 30 and its DSO is 35, customers pay roughly on time. If DSO is 52, they are paying about three weeks late on average, and that delay is cash the business is financing. Trends matter too: a DSO creeping up month after month usually means collections are slipping or a few customers are in trouble.
What moves it
- Terms: offering longer terms raises DSO by design.
- Invoicing speed: invoices sent late start the clock late.
- Invoice quality: errors and missing purchase order numbers cause customers to hold payment.
- Collections: consistent reminders and follow-up bring it down.
- Payment methods: direct debit and card payments shorten collection time.
Limits of the measure
DSO is an average. Seasonal sales can distort it, since a strong final month inflates receivables relative to the period's sales. An aging report gives the fuller picture of who is late and by how much.
Worked example
A quarter's DSO
A wholesaler makes $1.8 million of credit sales in a 90-day quarter and ends it with $1.04 million of receivables. DSO is $1.04M ÷ $1.8M × 90 = 52 days. Its terms are net 30. Customers are paying about 22 days late on average, which ties up roughly $440,000 of extra cash.