Days Sales Outstanding (DSO): Meaning & Interpretation
Alexandre (Finance Director @ Upflow)
Jan 17, 2025
DSO’s meaning lies in it’s full form: Days Sales Outstanding. It is a financial metric used to measure the average number of days it takes for a company to collect payment after a sale has been made. DSO is an indicator of the efficiency of a company's accounts receivable management and overall cash flow health. Days Sales Outstanding can be calculated by dividing total accounts receivable by the gross revenue over the period, then multiplying by the number of days in that period. In this blog we will talk about:
Check out our free spreadsheet template to calculate, improve and interpret your DSO!
DSO Meaning
Days Sales Outstanding (DSO) quantifies the average time it takes for a company to convert credit sales into cash. Also known as days sales in accounts receivable or debtor days, it is a vital metric for assessing a business’s cash flow efficiency and the effectiveness of its credit and collections processes.
For example, a company with a DSO of 30 days collects payments, on average, within a month after invoicing customers. DSO is can be calculated like this:
This is the simple formula, the more accurate method is called the countback method. You can delve deeper into these formulas in our DSO Calculation Blog, where we explore various methods for calculating days sales outstanding, and also explain them with real-world examples.
The true significance of DSO lies in its context. Whether viewed through the lens of accounting, finance, or general business strategy, this metric offers unique insights into cash flow performance and decision-making. Let’s explore these perspectives further:
DSO Meaning in Accounting
In accounting, DSO measures how long it takes to collect cash from credit sales, highlighting the efficiency of accounts receivable management. A low DSO reflects prompt payments, while a high DSO may indicate issues with credit policies or customer payment habits.
Accountants use DSO to monitor cash inflows, ensure liquidity, and align payment terms with industry standards. Regular calculation helps reduce bad debt risks and improve cash flow management.
DSO Meaning in Finance
In finance, DSO evaluates a company’s ability to convert credit sales into cash, directly impacting liquidity and working capital.
A high DSO ties up cash in unpaid invoices, increasing financial risk, while a low DSO ensures better cash flow. Financial analysts use it to benchmark performance, assess credit policies, and identify areas for improvement.
DSO Meaning in Business
For businesses, DSO reflects customer payment behavior, operational efficiency, and overall financial strategy. A lower DSO suggests efficient collection processes and strong customer relationships, while a higher DSO may signal inefficiencies or payment issues.
Business leaders rely on DSO to balance sales growth with financial stability, identify cash flow trends, and ensure sufficient reserves for growth, supplier payments, and other needs.
Factors Affecting DSO
Understanding the key factors that influence Days Sales Outstanding (DSO) is crucial for optimizing cash flow and improving financial performance. Here are five critical factors that directly impact DSO:
1. Credit Terms
The credit terms a business offers to its customers can significantly affect DSO. Shorter payment periods, such as Net 30 or Net 45, generally lead to quicker payments and a lower DSO. On the other hand, longer credit terms (e.g., Net 60 or Net 90) might increase DSO, but could also help in fostering stronger customer relationships or gaining a competitive edge.
2. Customer Payment Behavior
Customer payment patterns are one of the most significant factors influencing DSO. If customers regularly delay payments, this naturally leads to a higher DSO. Understanding your customers' payment habits and addressing late payment issues promptly can help maintain a more favorable DSO. Professionally drafted collection emails play a huge role in driving positive customer payment behaviour. Click on the banner below to download our free collection email templates
3. Industry Standards
Different industries have varying norms when it comes to payment terms, which directly affects DSO. For example, our state of B2B payments report suggests industries like facilities management and consulting have longer payment cycles due to the nature of their projects. It’s important to compare your DSO to industry benchmarks to assess whether your business is performing within the standard range.
4. Invoice Accuracy and Timeliness
Inaccurate or delayed invoices can contribute to a longer DSO. Small errors, such as incorrect amounts or missing information, can cause delays in payment processing. Ensuring that invoices are clear, accurate, and sent promptly can reduce disputes and speed up collections, helping keep DSO in check.
5. Internal Collection Processes
An efficient and proactive collections process is key to reducing DSO. This includes having clear payment terms, regularly following up with customers, and addressing overdue payments promptly. Automating reminders and leveraging AR software tools, like Upflow, can streamline collections and improve cash flow management.
How to Interpret Your DSO?
A high Days Sales Outstanding (DSO) indicates that a company is selling its products or services on credit but takes a long time to collect payments from customers. This delay can lead to cash flow challenges, as the company may struggle to access the funds needed for ongoing operations. Conversely, a low DSO reflects the company's ability to collect its accounts receivable quickly, ensuring a steady cash flow to support business growth. While the core definition of DSO remains consistent across industries, what constitutes a "good" DSO varies depending on industry norms and practices, as we’ll explore in the next section.
While DSO is a valuable metric, it’s most effective when used as part of a broader analysis. Monitoring DSO trends over time can reveal patterns in customer payment behavior and help identify potential cash flow issues before they become critical. By comparing your DSO against industry benchmarks, you can assess whether your credit and collections processes are competitive or need improvement. In essence, DSO is more than just a number—it’s a vital indicator of your company’s financial agility and ability to meet its short-term obligations.
Interested in calculating other important AR metrics? Click on the banner below and download our free spreadsheet
Now that you have this number at hand, you might be wondering what’s a good days sales outstanding. As is the case with all metrics, the answer is: it depends!
The meaning of DSO remains the same but what's a good DSO changes with different industries. Now let's take a look at the DSO's of various industries
Days Sales Outstanding (DSO) by Industry
Better than the average - which we all know isn’t that insightful - you’ll find below the median DSO for different industries. This Days Sales Outstanding benchmark will allow you to see where you stand in comparison with your competitors.
In our State of B2B Payments in 2024 report, the overall median DSO across industries is 56 days, but a closer look reveals significant variation, with some industries getting paid faster than others.
In traditional sectors such as Office & Facilities Management and Consulting, DSOs are notably higher, with businesses often operating on 90-day payment terms. However, even companies at the median in Office & Facilities Management struggle to enforce these terms. On the other hand, organizations in the top 25th percentile in this sector—those we refer to as 'the best in Upflow'—manage to achieve a DSO of 78 days, ensuring payments are received well within their terms.
Clothing, Accessories & Home businesses experience the lowest median DSO across all industries on Upflow. This may be because, as mentioned earlier, their need to maintain physical inventory encourages them to prioritize prompt payment after a transaction. Additionally, these businesses can more easily enforce payment through credit exposure—customers simply won’t receive their next batch of products until payment is made. This contrasts with industries like Office & Facilities Management, where evicting people from their offices isn't a feasible option if they fail to pay.
Let’s take a moment to remind you that you need to calculate your company’s DSO in order to see where you rank. Regardless of the method, you’re using here, it will help you get an idea of where you stand.
Now that you know where your company stands with your Days Sales Outstanding, you can focus on improving this number.
How to Reduce Your DSO?
If you have a higher DSO - that is, higher than your industry average - then you’ll want to reduce and improve it.
A lower DSO means a shorter cash conversion cycle, more opportunities to invest, and overall better working capital management.
A low DSO and efficient Cash collection can quickly improve your runway: as an example, going from an 80% to 140% collection rate can double your cash runway in a few months. Check out our free spreadsheet that calculates your runway, as well as the impact cash collection, can have on it.
Here are some ways to reduce and improve your DSO:
1. Automate your billing process
Sending and tracking your invoices automatically reduces human errors - which we tend to underestimate and reduces cash flow problems. By scheduling automatic reminders, you’ll be able to keep the process under control. This can look like a reminder to your team to send a personalized email to your client or to pick up the phone.
2. Maintain positive relationships with customers
In general, keeping regular contact with your customers is a good idea. It's essential that managing your days sales outstanding ratio doesn't negatively impact your relationship with your customers.
You should consider having a discretionary payment date relative to your relationship with them i.e. more flexibility with long-term customers and bigger accounts. Focusing on rewarding rather than penalizing customers is a good approach. A closer relationship means more loyalty, repeat business, and better feedback on your product or services.
That’s typically the role of Account Executives or Customer Service Managers, whose role isn’t only to close the sale - it’s also to help the company collect the money!
3. Offer customers incentives for early payment
An efficient way to reduce your DSO is to offer perks in your payment terms for your clients to do so. It could look like a % discount on said invoice if they pay early, or a discount on their next purchase with you. It could also be a kind of bonus that’s relevant to your business or even a gift!
One strategy for improving cash flow is offering early-payment discounts, but an even more effective approach is offering discounts to customers who agree to make a yearly payment upfront rather than monthly payments. This not only incentivizes customers but also secures more cash for the business and reduces the number of invoices that need to be processed or chased on a monthly basis.
Is your DSO high and are you having trouble getting paid on time? Have a look at our free guide with tips to get paid!
Limitations of DSO calculation
Tracking your Days Sales Outstanding is primordial in your business. It’s a very important KPI for CEOs and CFOs alike.
However, like everything, DSO has its limitations:
Every transaction needs to be linked to an invoice: If a client overpays or a credit sales note is issued, this needs to be linked to an invoice for the calculation of DSO to be accurate. Thanks to AR automation cash application can be automated if payments are made via the payment portal.
Invoice disputes are not excluded: If a client has been disputing an invoice, it’s likely overdue and it will weigh on your DSO month after month.
Not all invoices weigh the same: DSO doesn’t take into account the importance of the invoice: an invoice for $100 or for $100,000 has the same impact. Focusing on your DSO for bigger invoices will have a bigger impact on your business.
Your Days Sales Outstanding is an important financial KPI that needs to be tracked and reduced.
The way to calculate it is simple: you can use the simple method, the countback method, or - the best of both worlds - use a tool like Upflow to automate the calculation of the countback method.
At Upflow for example, we automatically calculate your DSO using the countback method when connecting your account with your invoicing solution. You can then track your DSO from your private dashboard without having to think about calculating it yourself.
Once you have calculated and compared your Days Sales Outstanding with other businesses in your industry, you should focus on improving this number. This will make a difference to your financial statements.
This can be done by automating your billing process, making sure you have a good financial relationship with your customers, and offering some incentives to encourage them to pay early.
Key takeaways
DSO Meaning: The average number of days it takes for a company to collect payment after a sale has been made
Your Days Sales Outstanding is an important financial KPI that needs to be tracked and reduced.
The way to calculate it is simple: you can use the simple method, the countback method, or - the best of both worlds - use a tool to automate the calculation of the countback method.
Once you have compared your Days Sales Outstanding with other businesses in your industry, you should focus on improving this number. This will make a difference to your financial statements.
This can be done by automating your billing process, making sure you have a good relationship with your customers, and offering some incentives to encourage them to pay early.
One thing is sure: your DSO value will make or break your business, so pay close attention to it for good financial health! Consider automating parts of your receivable process.
