The formula, and the part people get wrong
Days sales outstanding is average accounts receivable divided by credit sales for the period, multiplied by the number of days in that period. The arithmetic is easy. The mistake is in the second term.
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. Opening plus closing, divided by two. Using the closing balance alone makes a good quarter look bad and a bad one look good, depending on when your biggest invoice landed.
What a good DSO looks like
There is no universal number, and anyone quoting one is selling something. 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.
The rule of thumb worth knowing is that a DSO more than about a third above your terms usually means the problem is process rather than customers: invoices going out late, going to the wrong address, or missing a purchase order number so they cannot be matched.
What ten days is actually worth
This is the part that makes DSO more than an accounting ratio. 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, permanently, 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.
Related calculators
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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.
What is the DSO formula?
DSO equals average accounts receivable divided by total credit sales, multiplied by the number of days in the period. For a quarter, that is receivables divided by quarterly credit sales, times 90.
Should I use total sales or credit sales?
Credit sales only. Cash and card sales never entered receivables, so including them shrinks the denominator's counterpart and makes your DSO look better than it is. If most of your work is invoiced, the difference still matters.
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.
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.
What is the difference between DSO and average collection period?
They are the same calculation under two names. Some people reserve average collection period for a full year and DSO for any period, but the arithmetic does not change.
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.
Does a low DSO always mean things are going well?
Not always. A very low DSO can mean terms so tight that you are losing work to competitors who offer thirty days, or that you are discounting heavily for early payment. It is worth checking what it is costing you.
Where does this figure come from in my books?
Average receivables is on the balance sheet at the start and end of the period. Credit sales is revenue less any cash or card sales. Most accounting software will give you both in a single aged receivables report.