For many accounts receivable departments, Days Sales Outstanding (DSO) is one of the primary metrics by which they’re measured. It’s a straightforward and simple metric that answers the question, “how good are we at getting paid?”
It’s accepted across all industries that DSO is a reliable measurement tool. What’s not accepted, however, is what an ideal score is. It’s not difficult to define your DSO number, but it can be difficult to contextualize it.
So, what exactly is a good DSO score?
Defining a good DSO score
In general, most companies should aim for a score of 45 and under, but that comes with a lot of caveats.
There are numerous factors that can impact what would be considered good versus poor:
- Industry: What’s good for aerospace may be poor for textiles, for example. Companies that deal in large capital expenditures shouldn’t be held to the same standards as those that produce everyday goods or services.
- Your own standards: What are your payment terms? Are you net 30, net 60 or something else? Your own terms should be a guide for measuring DSO.
- Your peers: How effective are your primary competitors? Are you better or worse?
A 2016 study surveyed companies across 27 industries and found the median DSO score for each.
|Aerospace and Defense
|Automotive Parts and Aftermarket
|Computer Hardware and Peripherals
|Containers and Packaging
|Electronic Equipment, Instruments and Components
|Energy Services and Equipments
|Engineering and Construction
|Food and Staples Retail
|General and Specialty Retail
|Household and Personal Care
|Internet and Catalog Retail
|Metals and Mining
|Office Equipment, Services and Supplies
|Oil and Gas
|Semiconductors and Semiconductor Equipment
|Textiles, Apparel and Footwear
More DSO calculations and formulas
While standard DSO is most commonly used, there are other forms of DSO that may provide better insights into your A/R operation.
Standard DSO = (Ending Total Receivables / Total Credit Sales) x Number of Days in Period
Best Possible DSO
This calculates the absolute best DSO you can achieve. The closer you are to this figure, the closer you are to virtual perfection. Your terms of sale will impact it.
Best Possible DSO = (Current Receivables / Total Credit Sales) x Number of Days
Also referred to as Average Days Delinquent, Delinquent DSO calculates the average number of days invoices are past due. It’s a very direct way of determining exactly how tardy customers are at settling their accounts.
Standard DSO – Best Possible DSO = Average Days Delinquent
What DSO Can and Can’t Do
While DSO is a typical benchmark for A/R operations, it’s not the end all, be all. Ideally, it should be used with other metrics to create a holistic overview.
A good evaluation should include KPIs like Percentage of A/R Past Due and Days Past Due. This ensures that biases are filtered out. You may also consider a weighted form of DSO that accounts for outliers. If you have a single account that is 60 days overdue for 80 percent of your outstanding payments, your DSO will be flawed. It’s not designed for extreme cases like that.
Regardless, monitoring DSO and having a top mark in your industry is important. Being an industry leader means you’re more financially flexible than your competition and avoid unnecessary costs associated with financing or collections.
Embracing technologies like automation and payment portals will keep your score low, payments coming and provide companies and edge over their peers.
Understand your DSO with Invoiced Analytics
Invoiced offers Accounts Receivable Automation software that allows businesses to improve the efficacy of their A/R processes. From automated invoicing and collections to payments, analytics (like DSO), and integration capabilities, Invoiced puts the world of A/R at your fingertips.
Schedule a demo – live and tailored to your business – to discover how efficient your A/R can be with Invoiced.