DSO explained: how to work out Days Sales Outstanding

Days Sales Outstanding (DSO) is the average number of days it takes you to collect payment after you invoice. Work it out by dividing what customers owe you by your credit sales for a period, then multiplying by the number of days in that period. Compare the result with your payment terms: the further above your terms it sits, the longer your money is waiting in customers' accounts instead of yours.

What is DSO?

DSO measures the gap between sending an invoice and being paid, averaged across your customers. A lower DSO means you collect faster. A higher DSO means more of your money is sitting in accounts receivable rather than in the bank.

How do I calculate DSO?

DSO = (accounts receivable ÷ credit sales for the period) × days in the period

A worked example for one month:

• Accounts receivable at the end of September: AED 180,000.00
• Credit sales in September: AED 240,000.00
• Days in the period: 30

DSO = (180,000 ÷ 240,000) × 30 = 22.5 days

On average, it takes this business about 22 to 23 days to collect after invoicing. Use the same period each time (a month or a quarter) so the figures are comparable.

What is a good DSO?

There is no single good number, because it depends on the payment terms you give. The useful comparison is DSO against your own terms:

• At or below your terms: customers pay on time on average.
• A little above your terms: some invoices are drifting late. Worth watching.
• Well above your terms, or rising month on month: money is waiting too long, and your reminder process needs attention.

If you give 30-day terms and your DSO is 45, the average invoice is paid about two weeks late.

Why does DSO matter?

• Cash flow. Every day an invoice goes unpaid is a day you cannot use that money for wages, stock or suppliers.
• Borrowing costs. If you borrow to cover the wait, a higher DSO means paying interest for longer.
• Customer health. A customer who starts paying later than usual may be under pressure. DSO by customer shows it early.
• Process. A steady rise usually means invoices or reminders are going out late, not that every customer changed at once.

How can I lower my DSO?

1. Invoice promptly. The clock starts when you invoice, so send it on delivery.
2. Make invoices complete. Purchase order numbers, payment details, due dates and clear line items avoid queries that hold payment up.
3. Remind on a schedule. A reminder around the due date and another a week later keeps your invoice in front of the customer. See how to remind a customer about an overdue invoice.
4. Send one reminder per customer. One email listing every overdue invoice, with copies attached, is easier for the customer's accounts team to act on than several separate ones.
5. Make paying easy. Bank details on every reminder, and a payment link where you can.
6. Review your terms. If DSO stays high for one group of customers, their terms may be longer than you can carry.

How should I track DSO over time?

Work it out monthly and look at the trend rather than a single month. Seasonal swings are normal; a rise over three to six months is a sign to act. Breaking DSO down by customer, or by customer group, shows where to focus.

FAQ

What is the DSO formula? DSO equals accounts receivable divided by credit sales for the period, multiplied by the number of days in the period.

Is a lower DSO always better? Generally, yes: it means you collect faster. Compare it with your payment terms rather than with other businesses, because terms differ by trade.

Should cash sales be included? No. Use credit sales only, because cash sales are paid straight away and would make your DSO look lower than it is.

How often should I calculate DSO? Monthly is enough for most small businesses. Use the same period length each time so the numbers compare.