Days sales outstanding (DSO)
Days sales outstanding measures the average time it takes to collect cash after a sale. Here is the formula, a worked example, and what counts as a good number.
Days sales outstanding (DSO) is the average number of days a company takes to collect payment after a sale is made on credit. It is the single most-watched metric in accounts receivable because it translates the health of the whole collections process into one number that finance leaders track over time.
The formula
DSO = (Accounts Receivable / Total Credit Sales) x Number of Days
Pick a period, divide the receivables outstanding by the credit sales in that period, and multiply by the days in the period.
A worked example
Suppose a company has 300,000 in accounts receivable at month end and booked 450,000 in credit sales that month.
DSO = (300,000 / 450,000) x 30 = 20 days
On net-30 terms, a 20-day DSO is strong. Customers are paying ahead of the deadline on average.
What counts as good
There is no universal target, because the answer depends on the terms you offer. The useful comparison is against your own terms and your own trend. If DSO is creeping up month over month, collections are slipping regardless of the absolute number. If it sits well inside your terms and holds steady, the function is working.
DSO is a symptom, not a cause. A rising number sends you looking for the reason, which is usually a few large overdue accounts, a spike in disputes, or invoices that went out wrong.
Frequently asked questions
- What is the formula for DSO?
- DSO equals accounts receivable divided by total credit sales, multiplied by the number of days in the period. For a month, that is (AR / credit sales) x 30.
- What is a good DSO?
- It depends on your payment terms. A rough rule is that DSO should sit within about a third of your standard terms. On net-30 terms, a DSO under 40 is healthy and over 45 signals a collections problem.