Days sales outstanding, or DSO, estimates how long it takes on average to turn a sale on credit into cash. Every day of DSO is a day of sales that you have paid for (product, freight, labor) and your customers have not.

It is one number, which makes it easy to track and easy to misread. This article covers how to calculate it, what changes it, and what to do about it.

The formula

The common formula is:

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

For example, suppose that at the end of a 30-day month you have $100,000 in accounts receivable and you made $150,000 of credit sales during that month:

$100,000 ÷ $150,000 × 30 = 20 days

Another way to say the same thing: you sold $5,000 a day on credit ($150,000 ÷ 30), and you are carrying 20 days of those sales as receivables.

You can run your own numbers with the DSO calculator.

Choices that change the number

DSO is only comparable from month to month if you calculate it the same way every time. Decide these once and write them down.

  • Credit sales, not total sales. Sales paid at the counter or on delivery never sit in receivables. Including them in the divisor makes DSO look better than your credit customers actually pay.
  • Ending or average receivables. Using the balance on the last day of the period is simplest. Averaging the opening and closing balances smooths out a single unusual day.
  • The length of the period. A month reacts quickly; a quarter, or a trailing 90 days, is steadier. Either is fine if you stick with it.
  • Seasonality. If sales jump in the last weeks of a period, receivables jump with them and DSO rises even though nobody paid any slower. If your business is seasonal, compare each month with the same month last year, not just with last month.

Some finance teams use the countback method to handle seasonality. Instead of dividing by an average, you work backward through recent months of credit sales until you have accounted for the whole receivables balance, and count the days that took. For example, with 30-day months: receivables of $200,000, this month's credit sales of $150,000 and last month's of $100,000. This month covers $150,000 and 30 days. The remaining $50,000 is half of last month's sales, or 15 days. DSO by countback is 45 days.

Compare DSO with your terms

A DSO figure means little on its own. It means a lot next to the terms you give. If most customers are on Net 30 and DSO is 45, customers are paying, on average, about two weeks late.

A sharper version splits DSO into two parts:

  • Best possible DSO uses only the receivables that are not yet due: current receivables ÷ credit sales × days. It is the DSO you would have if every customer paid exactly on time.
  • Average days delinquent is DSO minus best possible DSO. It is the part caused by late payment.

Continuing the first example: of the $100,000 in receivables, suppose $60,000 is not yet due. Best possible DSO is $60,000 ÷ $150,000 × 30 = 12 days. Average days delinquent is 20 minus 12, or 8 days. The 12 days come from your terms. The 8 days come from collections, and that is the part you can work on without changing terms.

What a day of DSO is worth

One day of DSO ties up one day of credit sales. For example, a business with $3,650,000 a year in credit sales sells $10,000 a day on credit. Bringing DSO down by 5 days releases about $50,000 of cash.

That is a one-time release, not a yearly saving. The cash stays available as long as DSO stays lower. If DSO creeps back up, the cash goes back into receivables.

Why DSO rises

When DSO goes up, look for the cause before you start calling customers. The usual suspects:

  • Longer terms. New accounts or renegotiated accounts on longer terms raise DSO without anyone paying late.
  • A few large late payers. One big account sliding can move the whole number. The AR aging report shows whether the change is concentrated or spread across the book.
  • Slow invoicing. If invoices go out days after delivery, every due date starts late.
  • Disputes. Shorts, damages and price questions that are not resolved quickly hold up payment of the whole invoice.
  • Unapplied cash. Payments received but not applied leave receivables overstated. DSO looks worse than it is.

The levers that bring it down

  1. Invoice promptly and correctly. An accurate invoice on the day of delivery starts the clock on time and removes reasons to wait.
  2. Resolve disputes fast. Issue the credit or explain the charge within days, so the rest of the invoice gets paid.
  3. Apply cash daily. Receivables should show what is really still owed.
  4. Check credit before the order. Hold or review orders for accounts over their limit or past due, before more product goes out the door.
  5. Follow a written collection cadence. Statements, reminders and calls on a schedule, the same way for every account. AR aging 101 has an example cadence.
  6. Make paying easy. Card, ACH and autopay remove the friction behind some late payments.

What DSO does not tell you

DSO is an average. A DSO that looks fine can hide one customer who has not paid in months, offset by many who pay quickly. Track DSO as a trend, monthly, and read it alongside the aging report rather than in place of it. There is no single good DSO for every distributor; a good one is close to your terms and steady or falling.

How APFoodz helps

In APFoodz, credit checks run before an order is placed, and statements and reminders go out after. Cash application matches payments to customers and invoices, so receivables reflect what is really owed.