Understanding Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) is a key credit management metric that measures how long it takes a company to collect payment after a sale. In simple terms, DSO is the average number of days between a credit sale and its payment. Because cash flow is vital to any business, tracking DSO helps credit managers ensure receivables are being collected promptly. A high DSO means cash is tied up longer in accounts receivable and may signal cash-flow problems, while a low DSO indicates faster collection and more cash available for operations.

Calculating DSO

You can calculate DSO using a straightforward formula. The most common formula is:

DSO = (Accounts Receivable ÷ Net Credit Sales) × Number of Days in Period.

In practice, this often uses average or ending accounts receivable over the period. For example, if a company had $35,000 in receivables and $50,000 in credit sales during January (31 days), then DSO = (35,000 ÷ 50,000) × 31 ≈ 21.7 days. (Note that cash sales are excluded from net credit sales, since they have an effective DSO of zero)

Why DSO Matters

DSO directly relates to cash flow and working capital. Accounts receivable and DSO are components of the cash conversion cycle, so a lower DSO means faster cash collection and more liquidity. A long DSO leaves capital unproductive in unpaid invoices. In practical terms, every day of DSO is cash the company cannot use. Reducing DSO frees up cash to reinvest in growth, pay suppliers, or absorb shocks.

DSO also serves as a barometer of credit and collection processes. CFOs and credit managers use DSO to gauge the health of their order-to-cash cycle. DSO shows how efficiently cash flows into your business and highlights areas to collect cash faster. If DSO is rising, it can be an early warning that billing or credit processes are breaking down. For example, a sudden jump in DSO might indicate a billing error, a change in customer payment behavior, or weakening credit quality.

What Is a “Good” DSO?

There is no universal “good” DSO number; it varies by industry, business model, and credit policy. Generally, a DSO that is roughly in line with your payment terms and industry norms is reasonable. For example, if your credit terms are net 30 days, a DSO around 30 (or lower) would be expected. Investors often regard DSOs under about 45 days as healthy for many businesses, but this can vary widely. A survey of finance leaders found median DSOs ranging from about 11 days (Finance & Real Estate) to 41 days (Distribution & Transportation. That same survey reported Technology & Professional Services ~34 days and Manufacturing & Construction ~21 days. In contrast, industries like oil & gas or construction tend to have much higher DSOs (often 60+ days) due to long billing cycles and negotiations.

Ultimately, a “good” DSO is one that aligns with your strategy: it supports sales without unduly harming cash flow. Note also that an extremely low DSO can indicate an overly strict credit policy that might reduce sales.

Strategies to Improve (Reduce) DSO

Lowering DSO (i.e. speeding up collections) is often a priority for credit managers. Achieving it typically requires a multi-faceted effort across your organization. Here are key strategies, drawn from industry best practices:

• Benchmark and set goals. Start by collecting data on your current DSO and comparing it to peers or internal targets. Industry reports (e.g. Hackett Group surveys) or peer benchmarks can show what DSO is achievable in your sector. Use this insight to set a realistic target. Monitoring DSO over time (month-to-month or quarter-to-quarter) also helps you detect trends.
• Tighten credit approvals. Customer credit risk directly drives DSO. Implement rigorous credit underwriting and ongoing reviews. Set clear criteria for acceptable customer credit profiles and enforce them for all new accounts. Extend these standards to existing customers: flag those with slow payment histories or deteriorating credit, and require collateral or advance payments if needed. Since sales teams may resist stricter terms, align incentives so that faster-paying customers are rewarded. Effective credit vetting means fewer late-paying accounts, lowering overall DSO.
• Define and enforce payment terms. Payment terms (Net 30, Net 60, etc.) strongly influence DSO. Make sure terms are aligned with your cash needs and industry norms. If your terms are too lenient compared to peers, consider tightening them or offering justifiable concessions (e.g. early-payment discounts). Clearly communicate terms on each invoice and in customer agreements. Consider giving incentives for early payment (e.g. 2% 10-day discount) as a formal policy. Ensure every invoice explicitly states the due date and any incentives, to avoid confusion.
• Streamline invoicing processes. Fast and accurate invoicing is critical. Send invoices promptly – for example, immediately upon delivery or project completion – rather than batching them weeks later. Invest in billing automation if possible: automated order-to-cash systems eliminate many manual errors. Reduce mistakes by cross-checking that each invoice matches the customer’s contract (correct pricing, quantities, discounts) and the right billing address.
• Proactive accounts receivable management. Don’t wait passively for payments. Once an invoice is sent, have a schedule of follow-ups: email reminders a week before due, then on the due date, and escalating notices after a missed payment. Segment customers and prioritize collections on larger accounts or those chronically late. Many companies implement a formal collections policy: e.g. 30 days past due – polite reminder; 60 days – phone call from credit manager; 90+ days – involve management or consider legal/collection agency. During follow-ups, be cooperative: sometimes a good customer may simply need extended terms for cash flow reasons. Offering a short payment plan in exchange for partial upfront payment can preserve the relationship while still improving DSO. The goal is to recover receivables faster without losing the customer.
• Leverage payment options and technology. Modern credit operations can use online payment portals, ACH/wire transfers, or credit-card payments to accelerate cash. If many customers prefer digital payments (especially B2B buyers used to B2C convenience), offer those methods. Early payment discount programs (e.g. 1% 10 days) can also motivate customers. Additionally, consider tools like accounts receivable financing or factoring, which immediately convert invoices into cash (though at a cost) if DSO is chronically high and damaging your business.

Credit managers should tailor these strategies to their context: a tight credit market may require even stricter underwriting, while in growth mode one might balance faster sales vs. longer DSO.

Useful Tools and Resources

To simplify DSO management, credit managers can use calculators and apps:

• DSO Calculator: Free online DSO calculators let you plug in your AR and sales data to instantly compute DSO. This ensures consistency in formula usage and saves time on manual calculations.
• DSO Cash Flow Impact Calculator: Tools like the TreditIQ DSO Cash Flow Impact Calculator estimate how much cash would be freed by lowering DSO by a certain number of days. For example, reducing DSO by 5 days on $10M annual sales yields roughly $10M/365×5 ≈ $137,000 in accelerated cash.

Benchmark Reports: Industry associations and credit agencies often publish DSO benchmarks. For example, Dun & Bradstreet and trade associations sometimes share median DSO by sector. These can help you gauge where you stand.