What is Days Sales Outstanding (DSO) and Why Does It Matter for AR Teams
Strong cash flow starts with efficient accounts receivable management. Days Sales Outstanding (DSO) is one of the most crucial metrics used to assess how well the collection process is operating in the finance and AR teams. Knowing your DSO and how to reduce it over time can mean the difference between a business that scales and one that fails to meet its obligations.
What is DSO?
Days Sales Outstanding (DSO) is the average number of days required for a company to receive payment for its sales. It is a fundamental KPI in accounts receivable management: improving DSO leads to faster collections, better working capital and better cash flow. In finance functions assessing AR automation software, it is likely that DSO is the most important indicator used to compare pre versus post performance.
How can teams calculate DSO?
Before measuring DSO, you must first determine the specific period to measure. Common timelines include a month, quarter, or the entire fiscal year, depending on your requirements.
Once you have locked in a time frame for your calculation, it's time to gather the necessary data. In this case, you only need two main accounting values: the average value of accounts receivable and the average credit sales made during the same period.
Calculate the average value for accounts receivable by adding together the AR value at the beginning of the period and the AR value at the end of the period. Next, divide the sum by two. Now it’s time to calculate the average credit sales by dividing the total by the number of days in the given period. Finally, divide the average accounts receivable by the average credit sales. The resulting figure is your DSO metric and will tell you how long it takes for customers to pay on average.
The formula for this calculation is as follows:
DSO = (Average accounts receivable / Average daily credit sale) x Number of days in the period
Once you've calculated your DSO, we recommend comparing it to industry benchmarks and your company’s historical performance to assess the efficiency of your current collections strategy.
Do you want a high or low DSO?
While the ideal DSO will vary depending on industry and company, lower DSO numbers often indicate better cash flow and a healthier customer base. Generally speaking, teams also prefer a low DSO because it means that a company collects customer payments faster, leading to better-working capital management. Lastly, a low DSO often indicates a lower credit risk as customers that pay promptly are less likely to default.
How to improve DSO?
Companies and teams can improve their DSO by following these 4 best practices:
- Streamline invoicing and billing processes with an AR automation solution. Adopt AR automation software to streamline invoicing, payment reminders, and collections. Modern AR automation platforms like Centime reduce manual work across the entire receivables cycle, cutting DSO by accelerating every step from invoice delivery to payment reconciliation.
- Implement clear credit and collection policies. Conducting better credit risk assessments helps ensure that you exclusively work with customers that have a good track record of paying their obligations quickly and consistently.
- Offer incentives for prompt payments. Consider offering discounts or other incentives to customers who pay faster. This helps encourage customers to prioritize your invoices in their payment cycles and increases the likelihood of faster payments.
- Strengthen your customer relationships. Improving your customer service can directly help your DSO. By providing customers with better service, you encourage them to pay faster.
Important Takeaways for DSO
In conclusion, DSO is a critical metric for accounts receivable teams as it is an effective way to measure the efficiency of collections activities and cash flow. Knowing how to calculate DSO allows you to understand your performance relative to industry benchmarks or past results.
Reduce Days Sales Outstanding with Centime's AR Automation Software
Centime helps finance teams reduce days sales outstanding through intelligent AR automation, from automated invoice delivery and AI-powered collection workflows to real-time DSO dashboards. As a top-rated accounts receivable solution embedded in NetSuite, QuickBooks, and Sage Intacct, Centime gives you full control of your cash cycle.
FAQ Section
Q: What is a good DSO number?
A: A DSO under 45 days is generally considered healthy, though benchmarks vary by industry. B2B companies with net-30 terms should aim for DSO below 30–35 days. Using AR automation software can significantly help teams hit and sustain these targets.
Q: What's the difference between DSO and DPO?
A: DSO (Days Sales Outstanding) measures how long it takes to collect payments from customers. DPO (Days Payable Outstanding) measures how long a company takes to pay its own suppliers. Together they're key inputs into your cash conversion cycle.
Q: How does AR automation software reduce DSO?
A: By automating the follow-up process, A/R automation reduces delays in getting paid after the sale, generates automated payment reminders, and provides real-time visibility for overdue accounts, shortening the invoice-to-payment timeline.
Q: Can I compare my DSO to industry averages?
A: Yes. There are industry DSO benchmarks available from sources such as Atradius, Hackett Group and APQC. Centime also offers real-time DSO tracking, where you can compare with your own historical performance.
Q: Is DSO the same as accounts receivable turnover?
A: They're sort of related but not quite the same. AR turnover is the number of times AR is collected during a period and DSO translates into days. Both are important account receivable metrics and are usually reported in conjunction with each other.
