What is days sales outstanding?
Days sales outstanding (DSO) is the average number of days it takes to collect payment after a sale on credit. A lower DSO means cash comes in faster.
Average credit sales per day = Credit sales ÷ Days in period
Cash tied up beyond terms = (DSO − Terms) × Average credit sales per day
Receivables turnover = 365 ÷ DSO
Example
At the end of a 90-day quarter you have $45,000 in unpaid invoices, and you invoiced $120,000 during the quarter. DSO is $45,000 ÷ $120,000 × 90 = 33.75 days.
How to lower your DSO
- Invoice immediately. The clock can't start until the customer has the invoice.
- Make terms clear and enforceable. Put due dates and late fees on every invoice. See how to charge late fees on invoices and the late fee calculator.
- Remind early. A short reminder before the due date often works better than chasing afterward.
- Consider a discount for fast payment. Check its true cost first with the early payment discount calculator.
Slow collections also shorten your runway. Use the cash runway calculator to see how much breathing room you have.
Frequently asked questions
What is a good DSO?
It depends on your terms and industry. A common rule of thumb is that DSO within about one-third above your standard terms is reasonable, so under roughly 40 days on net 30. Track your own trend over time.
Should I use total sales or credit sales?
Credit sales. Cash sales are collected immediately and would make DSO look better than it is. If nearly all your sales are invoiced, total sales is a close substitute.
Which accounts receivable figure should I use?
The end-of-period balance is simplest. Some businesses use the average of the starting and ending balances to smooth out a big invoice at period end.