The DSO formula
Days sales outstanding (DSO) is the average number of days it takes your business to collect payment after a sale made on credit:
DSO = (accounts receivable ÷ credit sales for the period) × number of days in the period
For example, $250,000 of receivables against $1,800,000 of annual credit sales gives a DSO of about 51 days. Use credit sales only, cash sales never become receivables and would make DSO look better than it is.
How to read your DSO
- Compare it with your terms. If your standard terms are net-30 and your DSO is 51, customers pay about three weeks late on average.
- Watch the trend, not one number. A DSO that creeps up month after month is an early warning, even if it still looks acceptable.
- Look at the aging behind it. The same DSO can hide many small delays or a few very old invoices. An AR aging report shows which.
- Translate days into dollars. Each day of DSO is roughly one day of credit sales. On $1.8M of annual credit sales, one day is worth about $4,900 of cash.
10 practical ways to reduce DSO
- Invoice immediately when work is delivered, not at month-end.
- Get the invoice right the first time: PO number, correct entity, contact and backup documents.
- Confirm receipt of large invoices before they are due.
- Make paying easy: clear remittance details and electronic payment options.
- Follow up on a fixed cadence, not only when cash is tight.
- Call, don’t just email, once an invoice is past due.
- Resolve disputes fast and fix their root cause.
- Track every payment promise and follow up the day it is missed.
- Set and apply a credit policy: terms, limits and when to pause new orders.
- Review AR weekly with an aging report and a short list of actions.
That is exactly the work we do for clients every week, see our invoice follow-up service and AR reporting.
