What DSO tells you
Days sales outstanding is how long, on average, it takes to collect an invoice after a sale on credit. It is the number that tells you whether your terms are working. Net 30 on the invoice and a DSO of 58 means your terms are a suggestion, and the gap between the two is being financed by you.
The same figure goes by several names: average collection period, debtor days, receivable days. The cash released row in the calculator answers the question that matters most to a small business: if DSO came down by ten days, how much money would appear.
DSO calculation: the formula and an example
DSO = average accounts receivable / credit sales for the period x days in the period.
- Average receivables is the opening balance plus the closing balance, divided by two.
- Credit sales is sales on terms for the same period.
- Days in the period is 30 for a month, 90 for a quarter or 365 for a year. The period for sales and for days must match.
Worked example: $48,000 of average receivables against $420,000 of credit sales in a 90 day quarter is 48,000 / 420,000 x 90 = 10.3 days. The same business measured over a year uses a year's credit sales and 365.
The part people get wrong
Credit sales means sales on terms. Cash and card sales never sat in receivables at all, so putting total revenue in the denominator makes your DSO look shorter than it is, sometimes by half. If you take card payments at the door and invoice the rest, only the invoiced part belongs in this calculation.
Average receivables, not closing receivables. Using the closing balance alone makes a good quarter look bad and a bad one look good, depending on when your biggest invoice landed. Both balances come off the balance sheet, at the start and the end of the period.
What a good DSO looks like
There is no universal number that fits every trade. The useful comparison is against your own terms. If you invoice net 30 and your DSO is 45, you are financing your clients for fifteen days without being asked and without being paid for it.
A working check: when DSO runs well above your terms, look at process before customers. Invoices going out late, going to the wrong address, or missing a purchase order number so they cannot be matched all push DSO up, and all are fixable this week.
What ten days is actually worth
Cash released is your sales per day multiplied by the days you save. On $420,000 of quarterly credit sales, that is $4,667 a day, so pulling DSO down ten days puts $46,667 back in the account, without selling anything more.
It is also the cheapest money available to most small businesses. Ten days off DSO costs a few process changes. The same amount borrowed costs interest every month for as long as you hold it.
DSO, turnover and the aging report
DSO is one of three views of the same receivables. The accounts receivable turnover ratio is the same fact as a count: days in the period divided by turnover gives DSO. The AR aging report shows which invoices are behind the number, and the collection effectiveness index scores the collecting without being moved by a busy or quiet month of sales.
Related calculators
- AR turnover calculatorThe turnover ratio, and the days to collect behind it
- AR aging calculatorThe balance owed, split by how overdue it is
- CEI calculatorCollection effectiveness index, scored out of 100
Questions people ask
What is DSO?
Days sales outstanding is the average number of days it takes to collect payment after a sale on credit. It is average accounts receivable divided by credit sales for the period, multiplied by the days in that period.
How do you calculate DSO?
Divide average accounts receivable by credit sales for the period, then multiply by the number of days in the period. For a quarter: receivables divided by quarterly credit sales, times 90. $48,000 against $420,000 over 90 days is 10.3 days.
Should I use total sales or credit sales?
Credit sales only. Cash and card sales never entered receivables, so including them inflates the sales figure and makes your DSO look shorter than it is. If only a small share of your sales is cash or card the difference is small, but it only ever flatters the result.
What is a good DSO?
Compare it to your own payment terms rather than to an industry figure. Net 30 terms with a DSO near 30 means the terms work. A DSO much above your terms means either your customers pay late or your invoices go out late, and those have different fixes.
Is a high or low DSO better?
Lower is usually better, because it means cash arrives sooner. A very low DSO can still hide a cost: terms so tight that you lose work to competitors who offer thirty days, or heavy early payment discounts. Check what it is costing you.
Why use average receivables instead of the closing balance?
Because one large invoice landing just before period end would distort the closing balance and the ratio with it. Opening plus closing divided by two smooths that.
How do I lower DSO?
Invoice the day the work finishes rather than at month end, put the customer's purchase order reference on every invoice so it can be matched, send a statement monthly on a fixed day, and make paying a single step by putting payment details on the document.
Is DSO the same as average collection period or debtor days?
Yes. Average collection period, debtor days and receivable days are the same calculation under different names. Some people reserve average collection period for a full year and DSO for any period, but the arithmetic does not change.
How is DSO related to accounts receivable turnover?
They are two views of the same figure. Turnover is credit sales divided by average receivables; DSO is the days in the period divided by that turnover. A turnover of 8.75 over a year is 365 / 8.75 = 41.7 days.
How much cash does shortening DSO release?
Your credit sales per day multiplied by the days saved. It is a one-time release of working capital, but it stays released for as long as the shorter DSO holds.
Can DSO be negative?
Not with normal figures, since receivables and credit sales are both positive. A negative result means customer credit balances are larger than what is owed, which usually points at unapplied payments or credit notes to sort out.
Where does this figure come from in my books?
Opening and closing receivables are on the balance sheet at each end of the period. Credit sales is revenue for the same period less cash and card takings, from the profit and loss or a sales report.