Days Sales Outstanding (DSO): Meaning & Interpretation
Alex Louisy
Dec 12, 2024
Days Sales Outstanding is the full form for DSO. 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
DSO or as the full form suggests, Days Sales Outstanding's true meaning lies in it's ability to tell, how well your business is managing its credit and collections processes. By quantifying the average time it takes to convert receivables into cash, DSO, also known as days sales in accounts receivable or debtor days serves as a barometer for your company's cash flow performance. A low DSO generally means that customers are paying promptly, contributing to a healthier cash flow. On the flip side, a high DSO might signal collection delays, which could strain your finances.
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.
Factors Affecting DSO
Several factors can influence your DSO, such as industry norms, payment terms, and the creditworthiness of your customers. Some industries, like construction, may naturally have longer payment cycles, while others, such as retail, tend to have shorter ones. Similarly, companies offering extended payment terms (e.g., net 60 or net 90) might see a higher DSO compared to businesses that require payment within 30 days.
Additionally, customer relationships and the rigor of your collections process play crucial roles in shaping your DSO. A proactive approach to managing outstanding invoices can help reduce DSO, ensuring timely cash flow for your operations.
How to Use DSO
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.
Now that you understand the importance of Days Sales Outstanding. You would want to calculate it in the most accurate way possible. There are some tools that automate the whole process of calculating your DSO. Thanks to a DSO automation tool, say goodbye to human errors or time spent using multiple formulas
Finding a tool that automatically calculates your Days Sales Outstanding means you can spend more time actually improving it.
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.
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
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 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 financial relationship with your customers, and offering some incentives to encourage them to pay early.
One thing is sure: your DSO number will make or break your business, so pay close attention to it!
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.
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