Days Sales Outstanding

When calculating the DSO, you look at the company’s annual average accounts receivable and annual revenue. Calculating days sales outstanding can be a little tricky, but we’ve broken it down into these four steps:

1. Determine the average accounts receivable

average accounts receivable = (beginning accounts receivable balance + ending accounts receivable balance) / 2

2. Find the sales of the business. When looking at a public company, sales are reported on the income statement in the annual report. 
3. Select how many days are in the accounting period (month, quarter, or year).
4. Plug these figures into the formula (or calculator on this page) and compute.

Let’s do an example calculation together.

Spectro Technologies wants to find the average DSO for last year. At the beginning of the year, the company had $490,000 in accounts receivable. At the end of the year, it had $375,000 in accounts receivable. Let’s plug those numbers into the average accounts receivable formula. 

$432,000 = ($490,000 + $375,000) / 2

Spectro Technologies had an average accounts receivable of $432,000. Over that same period, the company brought in $6,200,000 in annual sales. We can now plug these numbers into the DSO formula and round to the nearest whole number. 

25 = ($432,000 / $6,200,000) * 365

Now we can see the average amount of time Spectro Technologies took to collect payment was 25 days. That means the company’s accounts receivable is in good shape. 

Companies that collect funds from customers have better cash flow and liquidity, a significant advantage. This often leads to better use of working capital. As a financial efficiency metric, DSO can also indicate telling information about a business’s customer base and operations. 

A higher DSO indicates a business is not getting payments quickly, which delays cash inflows to the company. Lack of cash affects all parts of a business and slows its growth. On the other hand, a low DSO means a company is receiving payments in an efficient manner, increasing its cash inflows. The company can then reinvest that cash wherever it is deemed best. 

Ideally, you want a low DSO, but there’s no universally “good” DSO number. Several factors can influence whether a certain DSO is high, low, or average, including a business’s industry and the accepted payment terms within that industry. Always look at the DSO of the industry to verify benchmarks. That being said, keeping your DSO below 45 is healthy. 

There are several strategies that can improve a high DSO. Below we’ve compiled the most effective ones to help you meet your goals. 

1. Understand your benchmarks: You need two essential criteria: internal (from the business) and external (from the industry). 
2. Understand your current numbers: To understand where your business stands, you need to look at its current DSO and compare it to your competitors and your past trends. 
3. Inspire your team: Without buy-in and collaboration, you’re not going to get very far. Every department can and should contribute to this effort, whether that’s by offering up new ideas or improving workflows within their department.  
4. Improve invoice management: As businesses grow, so too should their invoicing processes. That may mean streamlining internal processes or investing in better software services. 
5. Improve your process for collecting unpaid invoices: If payments are coming in late, review your processes for collecting late payments. Work with your accounts receivable team (if you have one) to learn more about current operations, repeat offenders, and trends. 
6. Clearly define terms of payment: Ensure the payment due date is listed clearly on your invoice. If you work with recurring payments, consider setting up automatic payments.
7. Offer many options for making payments: When you make it easy for customers to pay, they’ll make payments faster. Customers will also be more satisfied with the payment process when there are fewer hoops to jump through. 
8. Offer incentives for paying early: Offering customers a discount or other bonus for paying early (or doing anything that helps you meet your goal) often improves DSO and customer retention rates. 
9. Make low DSO a continual goal: To sustain efficient cash inflows, you must make DSO strategy part of everyday business objectives. This is an ongoing accounting process that hopefully never ends.

While related, DSO and receivable turnover are two different metrics. Days sales outstanding measures the number of days it takes to collect on sales (account receivables). Receivables turnover measures how often the accounts receivables are turned over within a specified period.