The 2 DSO Calculation Formulas: Which One to Choose?

DSO formulas and calculations are easier to understand and apply, when we first understand what DSO exactly is. Your Days Sales Outstanding - is a key metric that calculates how long it takes for you to get paid.

Days Sales Outstanding is the average number of days it takes for your outstanding invoice to be paid once it has been sent, thus it is also known as days sales in accounts receivable

It’s an important KPI to calculate because it is an indicator of your liquidity. Indeed it indicates your cash flow , tells you of your credit sales and payment times, and shows the efficiency of your payment terms and overall collection processes.

There are 2 DSO calculation formulas: the simple method and the countback method. The most accurate is the latter, but it is more time-consuming than the former. So keep reading to find out:

• The Simple Formula to Calculate DSO

• The Countback Method to Calculate DSO

• Benefits of the Countback Method to Calculate DSO

• DSO Benchmarks by Industry

• Steps to Reduce Your DSO

Check out free DSO calculator spreadsheet to calculate, interpret and improve your DSO!

The Simple Formula to Calculate DSO

Simple DSO Formula (With Example). 

The simple DSO method is named this way for a reason: it is a very quick and straightforward way to calculate Days Sales Outstanding.

To calculate it, you need to divide your Accounts Receivable at the end of the period by your gross sales over the same period. You then multiply this number by the number of days in the period. 

Depending on your industry, that might be a low DSO or a higher DSO than average. With time, you’ll get to know what your overall average DSO is and be able to spot any variation. 

Why The Simple Method to Calculate DSO Is Not Enough?

While this method is simple as it gives you a direct formula to calculate DSO, it doesn’t help you calculate a truly accurate DSO. Indeed, it is based on the average number of days it takes you to get paid over a given time frame. 

If you want to calculate your DSO over a year, using the simple method will not take into account any seasonality in your business. So if your business is closed in August or doesn’t do much turnover in December, your DSO calculation will not be accurate.

To get a more accurate result that factors in your normal yearly ebbs-and-flows of business, you’d have to calculate your DSO for these different periods. Then, you’d compare them against each other to get a loose idea of your cash conversion cycle. 

Not the simplest anymore - and still not as accurate as the next method we’re going to see. 

The Countback Method to Calculate DSO

DSO Formula: The Countback Method (With Example)

The countback method is the more complex of the DSO calculation formulas. With this method of days outstanding calculation, you go back to find exactly the amount of time it took your company to get paid. 

For this method, you need both your receivable balance and your gross sales amount over a given time frame - usually a month - from your balance sheet. Once you have these two numbers for each month, you compare them to each other going back in time. 

• If your AR amount is higher than your sales amount for the month, you add the number of days in the month to your DSO calculation (you start at 0).  When moving back a month, you subtract your gross sales from your A/R. 

• If your gross sales are higher than your A/R amount, you calculate a day sales outstanding ratio. You divide your sales by your accounts receivable and then multiply this by X number of days in your month. 
  

You count back every month until you find your gross sales are higher than your A/R. Once you’ve added this month’s ratio to your DSO, you’re done! Your DSO is the amount of time you’ve added together by counting back. 

Here’s an example to make the countback method formula more concrete: 

In May, your accounts receivable are superior to your gross sales, so you can add the days of the month straight to your DSO calculation. You then deduct your gross sales from your A/R balance to report it to the following month's A/R. 

DSO = 31 days.

$11,000 - $3,000 = $8,000 reported in A/R in June.

In June, your A/R is again higher than your gross sales, so you can again add the days of this month to your DSO. Then, you take out your gross sales from your accounts receivable to report it to the next month’s accounts receivable. 

DSO = 61 days.

$8,000 - $1,000 = $7,000 reported in A/R in July.

In July, your A/R is lower than your gross sales, so you calculate a ratio between both to find out the number of days to add to your DSO. For this, you use the DSO calculation formula used in the simple method: 

DSO = Your A/R at the end of the period / Gross sales over the period x Number of Days of the Period 

$7,000 / $10,000 * 31 days = 21

DSO = 82 days (61 + 21 days)

That’s it! You’ve calculated your DSO: 82 days is the time it takes to convert your invoices into cash. 

Benefits of the Countback Method to Calculate DSO

This days sales outstanding formula is more complex but more accurate too. That’s why most CFOs and finance professionals use this method to calculate their company’s DSO and that’s why you should use it too.

Unlike the simple method, it is not based on an average over a period of time. Since it goes back in time, you can be assured that the DSO result you get is the most accurate month-by-month (or period-by-period). 

Once you have your DSO value, you can benchmark it against your industry’s financial ratios. It’s always insightful to find out what the average accounts receivable to cash sales ratio is! 

And if your competitors have public accounts, you could even calculate their DSO and find out if there is much variation with yours. 

Of course, you can also use DSO calculation formulas to monitor your financial health over the years… For instance to see how a change in your pricing or profitability margin affects it. 

But that amounts to a lot of calculations to do! The good news is: that there is a better way to calculate your days sales outstanding ratio and set up a strategy to reduce it.

Why Using Excel Isn’t the Best for DSO Calculation.

While it is tempting to calculate your DSO on an Excel spreadsheet, it is not the best way to do it. If you want to use the countback method (the most accurate), then it requires a few DSO formulas and probably some switching between different tables. 

While it is doable (you could create a template for it), there are a few things to take into account: 

• It is error-prone: even the best mathematicians make mistakes sometimes. Calculating your DSO manually leaves room for inaccuracies. 

• It is not the most efficient: calculating your DSO by hand requires chasing the latest data from different softwares. The countback method is the most accurate but it does take time - especially if you want to calculate it for different periods. It’s time that could be used to actually work on achieving a lower dso. 
  

Automating Your DSO Calculation

So, what’s the most accurate way to calculate your DSO that’s also time-efficient? It’s using the countback method but letting a tool do the calculation for you. 

You could use an automated AR software with extensive analytics and dashboards, like Upflow! 

Our AR management solution automatically calculates your financial ratios - that includes your days sales outstanding. And, of course, we use the countback method to do so.  Upflow connects with your ERP or accounting software, so there is no need to keep switching between tables or software to chase the latest data. 

Not having to spend time calculating your days sales outstanding and juggling with different DSO formulas (and the other key financial metrics) means dedicating your energy to tasks with a higher added value. 

The obvious next step is to try to reduce your DSO, but before you do, it helps to know what a “good” DSO looks like. That can vary widely depending on your business model, customer mix, and the payment norms in your sector.

That’s why benchmarking your Days Sales Outstanding against similar companies is so useful. It helps you see whether you’re making real progress or simply aligning with typical industry ranges. With that in mind, let’s take a look at the median DSO across different industries.

DSO Benchmarks by Industry

Looking beyond simple averages, the table below shows the median DSO by industry. Use these benchmarks to understand how your Days Sales Outstanding compares with other companies in your space.

According to our State of B2B Payments in 2024 report, the overall median DSO across industries is 56 days. That headline number is useful, but the real story is the spread between sectors, since some industries collect much faster than others.

More traditional service categories like Office and Facilities Management and Consulting tend to post higher DSOs, often because 90 day payment terms are common. Even so, median performers in Office and Facilities Management frequently find it hard to get customers to stick to those terms in practice. By contrast, the top quartile of companies in that sector, which we call the best in Upflow, bring DSO down to 78 days, meaning they collect well within their agreed terms.

At the other end of the spectrum, Clothing, Accessories and Home businesses show the lowest median DSO on Upflow. One likely reason is the cash tied up in physical inventory, which pushes teams to secure payment quickly after each sale. They can also enforce payment more directly by controlling credit exposure, since customers may not receive their next order until outstanding invoices are settled. That kind of leverage is harder in sectors like Office and Facilities Management, where services cannot realistically be paused as easily.

To make these benchmarks meaningful, you will first need to calculate your own DSO. Whichever method you choose, it gives you a clear starting point and makes it easier to see how you compare.

Now that you know where you stand on Days Sales Outstanding, let us look at the actions that will help you bring it down.

Steps to Reduce Your DSO

Once you’ve benchmarked your Days Sales Outstanding, the next step is turning that insight into action. The goal is simple: get invoices out faster, remove payment friction, and follow up consistently, without damaging customer relationships. Here are five practical steps you can implement to start bringing your DSO down.

1) Tighten payment terms and set expectations early

Reducing DSO starts before the invoice is even sent. Make payment terms explicit in proposals, order forms, and contracts, and repeat them on every invoice. Align on due dates, accepted payment methods, and who approves invoices on the customer side, so there are no surprises when it’s time to pay.

2) Fix the invoicing fundamentals and bill faster

Late or inaccurate invoices are an easy way to add days to your DSO. Send invoices immediately after delivery, include the right PO or reference details, and make them impossible to misinterpret (clear line items, taxes, banking details, and due date). Standardize templates and workflows so nothing slips, especially at month end.

3) Make paying effortless (and hard to postpone)

Customers pay faster when the payment process is frictionless. Offer multiple payment options such as card, bank transfer, and direct debit where relevant. Add payment links directly in the invoice and reminders, and ensure the approver has everything needed to act quickly without emailing back and forth.

4) Automate follow ups and prioritize the right accounts

Consistent follow up is what moves invoices from “forgotten” to “paid.” Use automated reminders before and after due dates, then escalate thoughtfully with a clear sequence (email, call, stakeholder escalation). Combine automation with prioritization so your team spends time on the invoices that will actually move the needle, like high value accounts or repeat late payers.

5) Strengthen credit and collections strategy with the right metrics

Not all DSO problems are collections problems. Review credit terms for new and risky customers, set credit limits, and adjust terms based on payment behavior. Track metrics like AR aging, dispute rates, and Collection Effectiveness Index (CEI) to spot where delays come from, then continuously improve the steps that create the most friction.

Upflow helps you apply these tactics end to end, from faster invoicing and easier payments to automated follow-ups and real-time AR visibility. The result is lower DSO with less manual work and a smoother customer experience.

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