Days Sales Outstanding: What It Is & How to Use It 

Published on September 5, 2023

Days sales outstanding (DSO) is a metric that helps businesses track how efficiently they collect money their customers owe—particularly, how long it takes to receive payments.

DSO is only one of the several accounts receivable key performance indicators (KPIs) that you can use to track the health and operation of your business. Armed with the information gathered through these critical metrics, your leadership team and other key decision-makers will make smarter decisions about your finances and cash flow.

What is days sales outstanding (DSO)?

DSO reflects the average time — measured in days —  a business needs to collect on the credit-based purchases of its customers after an invoice has been issued. For example, if every single organization that bought from your business on credit paid in full and on time on the 30th day they received an invoice, you’d have a DSO of 30. In the real world, though, payments tend not to arrive consistently or smoothly. 

The longer it takes to receive the average payment from your customers, the higher your DSO will go. Cash sales, in turn, are considered to have a DSO of 0, since there is no delay between the delivery of goods or services and the corresponding payment.

DSO is a useful indicator in identifying and monitoring the health of a company’s cash flow. If a business consistently rates a low DSO score, that suggests a healthy industry, efficient accounts receivable (A/R), and happy customers. 

Conversely, if an organization consistently experiences a high DSO rating, it’s probable that there are severe issues with either the firm’s accounts receivable efforts or customer satisfaction. Either way, a higher DSO is a definite choke on the influx of capital to the organization. 

A business with liquidity issues will face all manner of challenges since a healthy portion of its funds are sitting in its customers’ bank accounts instead of its own.


Days payable outstanding (DPO) is very similar to DSO in nature — so much so that the two are often confused. However, DPO specifically focuses on the time your business takes to pay its credit-based debts. 

DSO focuses on the money flowing into your company; DPO focuses on the money flowing out.

To learn more about the nature and value of DPO, check out our corresponding blog: Days Payable Outstanding: What It Is & How to Use It.

DSO formula: How to calculate DSO

Determining DSO is straightforward. First, choose the timeframe you want to measure — typically 30 days. Then, identify the accounts receivable amount collected during that time. Finally, identify the total credit sales for that same period. 

After gathering these figures, you can input them into the formula below:

Day Sales Outstanding=Accounts ReceivablexNumber of Days
Net Credit Sales

Example of a DSO calculation 

Body Slam Vineyards Inc. is one of rural Iowa’s most popular wine companies. The vineyard holds amateur wrestling matches in a ring filled with grapes for two nights each week. Thanks to the company’s patented technology, the juice from the grapes smashed during these matches is collected and turned into wine, which is subsequently sold in the nation’s finest eateries and liquor stores.

In June, the vineyard drew in $35,000 in ticket sales to its wrestling matches (a cash-only business). The company also sold $83,000 of wine—all of which was purchased on credit by distributors. In that same month, Body Slam’s A/R team pulled in $79,000 worth of outstanding credit-based payments. Now admittedly, some of these payments covered debts that had been incurred in the previous month of May. But DSO reflects an average, so the timeline for an individual debt isn’t particularly relevant.

Based on its performance, the DSO score for Body Slam for the month of June would be:

Day Sales Outstanding=A/R: $79,000x30 days 
Net Sales: $83,000=DSO: 28.6 days

You’ll notice that because the wrestling ticket sales were solely composed of cash transactions, they were not used in the DSO calculation.

What is a good DSO? 

So considering the above example, is a 28.6-day DSO good? By most metrics, yes. But since life rarely gives straight, simple answers, the real answer is: it depends

Typically a DSO of 45 or lower is considered healthy. However, in a cross-industry survey conducted by the Credit Research Foundation, respondents noted an average of 38.86 DSO for their operations in Q1/2023. When determining the optimal DSO for your business, you should always consider the scores of your competitors and the top leaders in your market.

The appropriate average for your organization will also depend largely on your industry and the nature of your business. If you operate in a seasonal part of the economy, such as a farm or ski resort, you can expect your DSO to fluctuate considerably throughout the year. Similarly, if your customer pool tends to work on larger projects with longer payment timelines, you might experience a DSO above 45 days but be well below the industry average.

Beyond the score itself, you should also pay attention to how your DSO is trending — is it going up or down? How quickly is it shifting? A rapidly fluctuating score commonly indicates a potential problem with your cash flow.

On the other hand, a steadily increasing DSO should be equally concerning. You might be extending credit to too many buyers with poor credit ratings. Or your A/R efforts could be too disjointed or ineffective. Customer satisfaction might be plummeting. Or maybe you didn’t properly structure your credit terms to incentivize early payments — or discourage late ones.

Gradual changes over time should be expected, but you’ll want your historical trend to move toward lower numbers.

If you’d like more insight on good and bad DSO scores and a breakdown of industry averages, check out our article: What Is a Good DSO?

What other metrics make it easier to understand your DSO?

While DSO can prove extremely useful in monitoring cash flow and A/R performance, it only provides a limited snapshot of your operations. So to fully evaluate how well things are working, you often need to consider multiple intersecting data sets.

Ideally, you should regularly perform an accounts receivable analysis to understand better how cash flows throughout your operations. And these efforts should be coupled with trend analysis reports to gain historical context and bolster forecasting efforts. Some metrics you should include in your analysis are:

1. Accounts Receivable Turnover

Another tool for tracking the efficiency of your collection efforts, A/R turnover denotes how many times your business collected its average accounts receivable during a given period- typically one year.

Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable

2. Average Accounts Receivable

This metric reflects the average balance of the accounts receivable line item on your general ledger during a set time frame.

Average Accounts Receivable = (Starting A/R + Ending A/R) ÷ 2

3. Best Possible DSO

Much as the name suggests, the best possible DSO for a given timeframe captures the optimal DSO score your business could have received if everything ran perfectly. And by comparing your current performance against your potential, you can more easily identify efficiency challenges.

Best Possible DSO = (Current Receivables ÷ Total Credit Sales) x Number of Days

4. Collection Effectiveness Index (CEI)

Rather than focusing on the time required to complete collections, CEI instead captures the amount of debt paid off during a set period of time.

Collection Effectiveness Index=(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables)x100
(Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)

5. Delinquent DSO

Alternately labeled as “Average Days Delinquent,” delinquent DSO only measures the current time required for late payments—those that come in after the set payment deadline—rather than the average of all payments.

Delinquent DSO = DSO – Best Possible DSO

6. Percentage of A/R Past Due

This metric allows you to track how much of your outstanding receivables are collected after their set due date, making it a telling indicator for forecasting the likelihood of bad debt.

Percentage of A/R Past Due = Total of Overdue Invoices ÷ Total Accounts Receivable

How can you improve your DSO? 

1. Address problem customers

Beyond getting an average for your entire business, you can also run DSO calculations on individual clients or accounts to determine how quickly they pay their outstanding debts. For those businesses that repeatedly miss payment deadlines, consider limiting or ending their pool of credit or renegotiating payment terms. It might also prove useful for bolstering your initial credit checks to avoid accumulating more delinquent purchasers.

2. Encourage early payments

To net a DSO that is shorter than your stated credit terms, consider offering early payment discounts or similar incentives. If your customers can see a clear financial advantage to resolving their debts within the first 1-2 weeks of receiving an invoice, they are much more likely to do so.

3. Automate

If your A/R efforts rely solely on manually-driven processes, you can carve out unnecessary delays by embracing automation. With automated workflows, you’ll cut the time required to send out invoices and any follow-up communications or reminders. And by removing manual transcription from your operations, you’ll also be able to improve the accuracy of your initial invoices, eliminating the time required for corrections and improving customer satisfaction.

Learn how to write effective follow-up e-mails with our article: How to Write a Past-Due Invoice Email

4. Make it easier to pay you

If your business only accepts checks, don’t be surprised if you have a higher-than-average DSO. Instead, provide your customers with multiple payment options. Similarly, you should consider pushing your client base towards electronic payments — which avoid shipping delays — by embracing an e-invoicing strategy that can transmit payment requests directly to your customer’s enterprise resource planning (ERP) systems. Or you might put in place a payment portal to provide buyers with a single place to pay.

Invoiced: Automated A/R insights and more

In most cases, a shrinking DSO will indicate more efficient, effective, and lucrative operations. Making smart decisions — like choosing the right automation platform — helps simplify your A/R processes and provides you with direct access to critical KPIs. 

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.

Published on September 5, 2023

Latest Stories

Here’s what we've been up to recently.

Hands holding a device reflecting AI in payments
The use of AI in payment processing is becoming more widely adopted – learn exactly what it is, how it’s used, its benefits for digital payments, and more.
Blue binder labeled payment terms next to a clock and a pen
Explore invoice payment terms, types, examples, strategies on how you can get paid faster, and more in our comprehensive guide for businesses.