What is Days Sales Outstanding (DSO): Definition, Formula, and Best Practices

"Days Sales Outstanding" (DSO) is a financial metric that indicates the average number of days it takes a company to collect payment after making a sale. In today’s market, about half of U.S. B2B invoices are overdue and ~8% are written off as bad debt, which is why tightening DSO is a priority for finance teams.

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To understand DSO, imagine a busy café where customers come in and order their coffee. Instead of paying right away, they add it to a tab and promise to pay later. The café, much like a business, needs the money from sales to pay for its supplies (like coffee beans and milk), staff, and other expenses. If customers take too long to pay, the café might not have enough cash on hand to restock supplies or pay its employees, even though on the surface business is booming.

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In this metaphor, the time it takes for customers to pay their tabs is akin to DSO for a business. A lower DSO means customers are paying their bills relatively quickly, which is like café customers paying right after they finish their coffee. This is ideal because the business gets the cash it needs to keep running smoothly without interruption. On the other hand, a higher DSO means it's taking longer for customers to pay, which can be problematic, like café customers taking weeks or months to settle their tabs.

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What is DSO? Understanding Days Sales Outstanding

Days Sales Outstanding (DSO) is a crucial financial metric for accounts receivable that tells us how long, on average, it takes a company to collect payments from its sales on credit. Track DSO against industry peers because working-capital conditions shift: receivable days lengthened in 2023, then aggregate CCC improved to ~37 days in 2024 among large U.S. companies. Think of it as a timer that starts when a customer buys something and stops when they pay. If the timer ticks quickly, it means the company is efficiently collecting customer payments; but if the timer lags, it's a red flag that can signal oncoming cash issues.

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By keeping a close eye on DSO, businesses can identify important trends, pinpoint issues in their credit policies or collection processes, and take corrective actions. For example, if your DSO is rising, it might signal that customers are taking longer to pay due to dissatisfaction with the product or service, financial difficulties, or too lenient credit terms. Addressing these issues promptly will help your businesses avoid cash flow crunches, ensuring you have the funds you need to thrive and grow.

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DSO vs. DPO: What’s the Difference?

As we’ve covered above, Days Sales Outstanding (DSO) reflects the average time it takes to get paid after making a sale. On the flip side, Days Payable Outstanding (DPO) is the average time a company holds onto its cash before settling its own outstanding bills to vendors. In short, DSO is about money coming in, while DPO is about money going out.

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While DSO focuses on speeding up cash inflow, DPO aims at delaying outflows to optimize working capital. Together, these two metrics reflect how efficiently a company manages its receivables and payables, or overall cash flow. Use DSO to target collections & invoicing changes (reminders, portal, ACH), and DPO to shape AP approvals & payment scheduling—both feed your cash conversion cycle target.

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The Critical Role of DSO in Business Finance

Properly managing DSO helps your business ensure it has enough cash for day-to-day operations and future growth, marking a well-run company. When you have a shorter DSO, you are able to quickly meet immediate financial obligations like paying salaries, purchasing inventory, and covering operating expenses.

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Having cash on hand also enables you to take advantage of early payment discounts from suppliers and reduces the need for external financing, which can come with high-interest costs.

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Decoding the DSO Formula

The standard formula to calculate Days Sales Outstanding (DSO) is fairly straightforward:

DSO = (Average Accounts Receivable / Total Credit Sales) * Number of Days

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Also know the ‘countback’ method: start from period-end AR, work backward through daily/weekly credit sales until the balance is “consumed,” and count the days. It’s preferred when sales are seasonal or volatile because it adjusts for uneven sales patterns.

Here's what each component means:

Average Accounts Receivable: This is the amount of money your customers owe you for goods or services delivered. The average is typically taken over a specific period, like a month or a year, to smooth out fluctuations and provide a more consistent measure.
Total Credit Sales: This refers to the total sales made on credit during the same period used for the average accounts receivable. It's important to use only credit sales because cash sales don't contribute to accounts receivable—because cash is received at the time of the sale and DSO refers to sales where the customer didn’t immediately pay.
Number of Days: This is the number of days in the period you’re calculating. For example, if you are calculating DSO for a year, this would be 365 days (or 366 for a leap year). For a month, it would depend on the specific month, ranging from 28 to 31 days.

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Use this formula to tell you how many days' worth of credit sales is tied up in accounts receivable at any given time. A higher DSO means it's taking longer to collect on sales, tying up cash that could be used for other business activities. Conversely, a lower DSO indicates quicker collections and better cash flow efficiency.

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How to Calculate DSO? A Step-by-Step Guide

Next, let's walk through an example of how to calculate DSO.

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If a company has an average accounts receivable of $50,000, total credit sales of $600,000 in a year, the DSO would be calculated as follows:

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DSO = (50,000 / 600,000) * 365 ≈ 1/12 * 365 ≈ 30.4 days

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This result means that on average, it takes the company about 30 days to collect payment after a sale is made on credit.

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Benchmarking DSO: What's a Good DSO for My Industry?

Based on data from the Hackett Group 2022 Working Capital Scorecard , the overall average DSO in 2021 was 40.6 days, but the median for the 1,000 companies analyzed was higher at 48.7 days. That said, take this data with a grain of salt since DSO varies widely across (and even within) industries. Treat benchmarks as moving targets: J.P. Morgan reported longer receivable days in 2023 across the S&P 1500, while The Hackett Group shows the 2024 CCC rebounded to ~37 days overall—your goal should be peer-set and trend-based, not a single universal DSO.

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While some companies have payment terms of 30 days, others offer more and others offer less. This greatly affects DSO.

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The industries with the highest Days Sales Outstanding (DSO) were Engineering & Construction and Energy Services & Equipment, with DSOs of 100 and 82 days, respectively.

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On the lower end, Food & Staples Retail and Homebuilding showed the lowest DSOs at 11 and 6 days, indicating a quicker turnover in collecting receivables.

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High or Low? How to Find Your Perfect DSO

Finding the right DSO is all about balance. You should strive for a balanced DSO that supports cash flow without sacrificing customer satisfaction.

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As we’ve mentioned above, it's ideal to keep DSO low to bolster financial stability and agility. However, too low a DSO may drive away customers if they feel that your credit terms are too strict.

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On the flip side, a high DSO can signal easy credit terms and possibly increase sales – at the risk of tying up valuable cash in outstanding receivables, which could strain your team’s finances.

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5 Proven Strategies to Improve Your DSO

Here is a list of 5 tactics to shorten your Days Sales Outstanding:

Streamline Invoicing: Implement fast, accurate invoicing systems to reduce delays from the start. Include ACH ‘Pay now’ links on every invoice; ACH volume reached 33.6B in 2024 and Same Day ACH surpassed 1.2B (+45% YoY)—these rails materially shorten time-to-cash.
Communicate Clearly with Customers: Maintain open dialogue about payment expectations and issues.
Offer ACH-first, card, and portal payments. Default to ACH and surface a secure portal link in every notice; when speed matters, Same Day ACH is broadly available.
Regularly Review Credit Policy: Adjust credit terms based on customer payment behavior and risk.
Automate Payment Reminders: Use software to send timely payment reminders and follow-ups, reducing oversight. Automate reminders with a set cadence. Most AR tools let you schedule pre-due and post-due reminders and configure up to five reminders, which reduces manual chasing and lowers DSO.

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Common Pitfalls in Calculating DSO

Common mistakes in calculating DSO include not adjusting for seasonal sales variations, using inconsistent time frames, and overlooking changes in sales patterns. If your sales are seasonal or uneven, consider switching to (or cross-checking with) the countback method to avoid misleading DSO movements.To avoid these, make sure to normalize data for seasonality, maintain consistent periods in your calculations, and account for sales fluctuations.

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Navigating DSO Challenges: Expert Insights

Businesses often struggle with maintaining consistent cash flow due to high DSO, arising from inefficient invoicing, poor communication with customers, and inadequate credit management.

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The best ways to minimize these issues is to: adopt a proactive approach in invoicing, establish clear payment terms, maintain regular communication, and implement stringent credit policies.

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Additionally, leveraging technology for automated reminders and real-time tracking can significantly reduce DSO, improving overall financial health. Accounts Receivable automation assists in all of these areas, making receivables management easier and faster than ever.

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The Importance of DSO Tracking: Beyond the Numbers

Actively monitoring DSO not only tracks cash flow efficiency but also signals when it's time to enhance credit policies or collection methods. Compare your DSO to your peer set and track the trend line—benchmarks shifted worse in 2023 and improved in 2024, so goals should be sector-specific and updated annually.

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By diligently managing your DSO, you can make more informed decisions on budgeting, capital investments, and setting credit terms, thereby fostering a more secure and forward-thinking environment.

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DSO and Other Crucial Financial Metrics

In addition to DSO, there are several other metrics that provide a rounded view of your collections and cash management efforts. These include, but aren’t limited to:

Days Payable Outstanding (DPO): Measures the average time it takes your company to pay its own bills, impacting cash flow.
Days Inventory Outstanding (DIO): Gauges how quickly your firm turns its inventory into sales, affecting cash reserves.
Aging Schedule: Breaks down your receivables by how old they are.
Collection Effectiveness Index (CEI): Measures the quality of your team’s collections performance over a given period.
Current Ratio: Assesses your company's ability to pay short-term obligations, relevant for immediate cash flow status.

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Tracking these metrics can provide businesses with a comprehensive understanding of their financial health and effectiveness of their collections strategy.

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Understanding DSO Limitations: A Balanced Perspective

DSO, while useful, isn't perfect. It's vital to view DSO in context, considering industry benchmarks and trends over time rather than relying on it solely.

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Combining DSO with other financial metrics offers a more comprehensive financial health picture, avoiding skewed interpretations due to its limitations.

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Leveraging Technology: Reducing DSO with Centime's AR Automation

Centime’s AR automation helps your team get paid faster and lowers your DSO by prioritizing invoices, forecasting cash inflows using AI, and streamlining collections. Prioritize automated reminders, ACH-first payment flows, and cash-application automation—the rails (ACH/Same Day ACH) and reminder tooling outlined above are what typically move DSO first.

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Our system also enhances the overall customer payment experience, leading to fewer overdue invoices, and provides a secure portal for payments, reducing fraud risk. These features together accelerate revenue, streamline collections, and provide key performance insights for your team.

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Conclusion

Understanding and managing "Days Sales Outstanding" (DSO) is crucial for financial success. A low DSO means quicker payment collections, ensuring a steady cash flow, essential for operational stability and growth opportunities. Conversely, a high DSO might indicate inefficiencies in collections, potentially straining cash reserves.

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Your team should aim for a DSO that aligns with your industry standards and supports your cash flow needs without compromising customer relations. Remember, effective DSO management is a balance of enhancing liquidity and financial health, and should be part of a broader strategic financial plan.

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If your team is looking to shorten your DSO and get paid faster, AR automation may be able to help. Try out our AR Automation ROI Calculator to see how much money your team can save by automating your receivables management.

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**Deposit placement through ICS is subject to the terms, conditions, and disclosures in the applicable agreements. Although deposits are placed in increments that do not exceed the FDIC standard maximum deposit insurance amount (“SMDIA”) at any one destination bank, a depositor’s balances at the institution that places deposits may exceed the SMDIA (e.g., before settlement for deposits or after settlement for withdrawals) or be uninsured (if the placing institution is not an insured bank). The depositor must make any necessary arrangements to protect such balances consistent with applicable law and must determine whether placement through ICS satisfies any restrictions on its deposits. A list identifying IntraFi network bank

What is Days Sales Outstanding (DSO): Definition, Formula, and Best Practices

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