Days Sales Outstanding (DSO) measures how quickly a company collects payment after making a sale, insight that’s essential for managing working capital and maintaining liquidity. For finance professionals, the DSO metric is a critical indicator of cash flow health and operational efficiency.
What Is DSO
DSO measures the average number of days it takes an organization to collect payment from its customers. It’s a key part of managing your cash flow and signals how well your accounts receivable processes are performing.
A low DSO suggests that your company is collecting cash quickly and efficiently. A high DSO may indicate cash flow issues, customer payment delays, or inefficiencies in your invoicing process.
How to Calculate DSO
Here is the formula:
The amount of sales outstanding expressed in days is calculated as: [Average of gross accounts receivable (AR)] /([Total gross annual sales] / 365). Exclude all unbilled receivables when calculating this measure.
Example:
- Accounts Receivable: $300,000
- Total Gross Annual Sales: 3,600,000
- Number of Days: 365
Days Sales Outstanding is 30 days
APQC finds that top performers (in the 25th percentile) on this metric get paid in 30 days or less, while bottom performers (75th percentile) take 46 days or longer to collect. Companies at the median take 38 days or less, on average, to collect payment on customer invoices. Keep in mind that these figures reflect cross-industry data. A “good” DSO score will vary by industry and business type. For that reason, you should benchmark your DSO against peer organizations for the best assessment of your performance.
Why DSO Matters:
Cash Flow Health:
DSO directly impacts cash flow. If cash is tied up in unpaid invoices, it can limit your ability to reinvest in the business, pay suppliers, or cover other operational needs.
Customer Relationships:
DSO can also reveal insights into your customers’ payment habits. A rising DSO might indicate that customers are experiencing financial difficulties or that your payment terms need to be revisited.
Operational Efficiency:
For CFOs and financial leaders, DSO is an important KPI to monitor over time. Tracking DSO can uncover inefficiencies in your billing or collections processes.
Financial Performance:
Achieving an optimal DSO requires careful consideration of your market, positioning, and customer relationships. Once you establish a target DSO, you can track the metric and manage accounts receivable to make sure you hit it consistently.
Best Practices to improve DSO:
- Invoice promptly and accurately and follow up on overdue accounts quickly.
- Allow for different payment methods to provide flexibility and meet customer needs.
- Use software and technology to streamline invoicing and payment tracking.