Days Sales in Accounts Receivable (AR): Meaning & Formula
Quentin Gaudinat
Oct 8, 2024
Days Sales in Accounts Receivable, commonly referred to as DSO or AR Days, is a financial metric that tracks the average time it takes a company to collect payment following a sale. It is a key indicator of the company's efficiency in managing accounts receivable and maintaining healthy cash flow. Keep reading to find out:
Check out our free AR Days/DSO calculator spreadsheet to calculate, interpret and improve your AR days!
What is Days Sales in Accounts Receivable?
Days Sales in Accounts Receivable, also known as Days Sales Outstanding (DSO), Accounts Receivable Days, or Debtor Days, serves as a key indicator of how efficiently your business manages its credit and collections. Regardless of its different names, DSO’s true value lies in measuring the average time it takes to convert receivables into cash, acting as a barometer for your company's cash flow health. A low DSO typically indicates that customers are paying on time, supporting a strong cash flow. Conversely, a high DSO may highlight collection delays, potentially putting financial pressure on your business.
Days Sales in Accounts Receivable Formula
There are 2 calculation formulas for days in AR: 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:
Simple AR days Formula (With Example).
The simple method is a very quick and straightforward way to calculate your accounts receivable days
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. The DSO or AR days Formula looks like this:
Let’s take a quick example:
Your sales at the end of the year are $2,000,000.
Your Accounts Receivables are $200,000.
Using the simple method, your days in AR would be $200,000 / $2,000,000 * 365 = 36,5 days
That means that over the year, it took your business 36,5 days on average to get paid.
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.
Having trouble using this method? Download our free formula spreadsheet.
The Countback Method for AR Days (With Example)
The countback method is the more complex of the 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 accounts receivable days or 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 AR days or 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 AR days calculation. You then deduct your gross sales from your A/R balance to report it to the following month's A/R.
Days in AR = 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 Days in AR or DSO. Then, you take out your gross sales from your accounts receivable to report it to the next month’s accounts receivable.
Days in AR = 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 days in accounts receivable 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
Days in AR = 82 days (61 + 21 days)
That’s it! You’ve calculated your AR days: 82 days is the time it takes to convert your invoices into cash.
Automating Your Accounts Receivable Days Calculation to Improve Your AR Collection.
So, what’s the most accurate and time-efficient way to calculate your days sales in accounts receivable? 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!
At Upflow for example, we automatically calculate your AR days 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 number for accounts receivable days. 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
Accounts Receivable Days by Industry
To help you better interpret your AR days we analysed the median AR Days of various industries in our State of B2B Payments in 2024 report, as seen below:
On the other end, Clothing, Accessories, and Home businesses experience the lowest median DSO across all industries tracked by Upflow. This could be due to their reliance on physical inventory, which drives a need for quicker payment following a transaction. These businesses can also more easily enforce payment by controlling credit exposure—customers won't receive new inventory until previous invoices are settled. This dynamic contrasts sharply with sectors like Office & Facilities Management, where the inability to 'evict' clients from their offices for non-payment makes it harder to enforce timely payments.
Now that you know where your company stands with your days in AR or DSO, you can focus on improving this number.
How to Lower Your Days Sales in AR?
1) Maintain an Efficient Invoicing Process
Invoicing is crucial to any business, and an effective process can lower your days in AR. Be proactive: send invoices on time, set follow-up reminders, and ensure invoices include clear due dates, payment terms, and correct details. Even small mistakes, especially if you track manually, can delay payments and increase AR days.
2) Create a Convenient Payment Process
If customers struggle to pay, your DSO will suffer. Simplify the process by offering multiple payment options (e.g., bank transfer, card) and ensuring they have the right information, like payment links and due dates, on every invoice.
3) Incentivize Early Payment
Encourage early payments with discounts or bonuses. This strengthens your cash flow and customer relationships. Offering rewards is more effective than penalizing late payers—just ensure payment terms are clearly stated on your invoices.
4) Automate Your AR Process
To reduce AR days, automation is key. A/R software automates invoicing and reminders, letting you focus on high-risk accounts. Upflow provides real-time invoice tracking and multiple payment options, making it easier to streamline your process.
5) Track Other Key Metrics
Beyond days sales in accounts receivable, monitor AR aging reports to identify overdue accounts, your collection effectiveness index (CEI) to track payment success, and billing cohorts to evaluate how well your cash collection processes perform over time.
Key Takeaways:
Days Sales in Accounts Receivable is just another term for Days Sales Outstanding (DSO), Accounts Receivable Days, or Debtor Days.
Days Sales in Accounts Receivable is the average number of days it takes for a company to collect payment after a sale has been made. It 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 AR days 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 AR and invoicing process, creating a convenient payment process, incentivizing early payment and tracking other key metrics.
A software like Upflow allows you to spend less time on calculating KPIs and more time on implementing your long-term strategy.
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