How To Calculate DSO

The longer it takes a company to be paid, the more they stand to lose. That’s because the company misses out on the opportunity to use that money for their own ends, whether it be paying overhead costs or reinvesting into the business. In other words, a dollar today is worth more than a dollar in 60 days.

Calculating DSO helps companies stay aware of these timelines by measuring how many days it takes to receive payments over any given period. It takes just four steps to calculate DSO:

1. Determine the period you want to measure: DSO is often used annually, but can be applied to shorter periods, even down to one month. The calculation always uses the number of days in the period.
2. Identify the accounts receivable balance for that period: This is the amount owed to your company for the service provided to the customer on credit.
3. Identify the total credit sales for that period: This revenue excludes sales paid for in cash since there were no days that the payment was outstanding.
4. Enter the data points into the DSO formula: The result will tell you how many days on average it takes your company to retrieve payments from customers.

Comparing a DSO calculation to previous periods can assist in finding market trends, enabling companies to anticipate customer performance, such as late payments.

How To Use the DSO Formula

Look to the example below for a walk-through on how to calculate DSO:

Company X has $300,000 in credit sales and $50,000 in accounts receivable for the first three months of the year. 

How would Company X measure their DSO for this period?

First, they’d need to divide the accounts receivable by the credit sales: 

50,000 / 300,000 = 0.17

Then they’d multiply that value by the number of days in January through March:

0.17 x 90 = 15.3

Company X’s DSO for this period is 15.3.

How To Interpret Good and Bad DSO

In general, companies are always looking to reduce their days sales outstanding to the lowest possible figure, in light of their customers ability and willingness to pay. This shows that their processes are efficient, resulting in more timely payments.

A high DSO number results in lower cash flow for the company. Companies in this situation should look at ways to improve their collections processes so they can increase their liquidity.

For perspective, in the third quarter of 2022, the national DSO average was 37.3 days. However, what’s considered a high or low DSO for a company is largely dependent on the industry in which it operates. For instance, the agriculture industry relies on relatively fast payments compared to industries that are not affected by weather or spoilage.

The size of a company within an industry is also important to note. A small business is more likely to operate on tight cash flow than a large, well-established corporation, so comparing their DSOs is not as practical.

Plus: Average DSO in Different Industries

See how your business compares to the average DSO in your industry by looking to the chart below:

4 Tips To Improve Your Business’s DSO

If your current DSO is not where you want it to be, there are some practices you can implement to improve your credit process and encourage on-time payments:

1. Offer discounts for cash or early payments: Credit purchases can be a great resource to attract new clients, but the costs of failed payments can quickly cancel them out. Discounts provide an additional incentive to honor established payment terms. 
2. Restrict accounts with late payment histories: After a customer shows they can’t properly manage their approved line of credit, consider reducing it to a more manageable amount or removing certain features until they can remain in good standing. 
3. Automate the collections process: Free your team from the tedious tasks related to following up with overdue accounts by using services that can handle them for you. This can also reduce the occurrences of administrative errors and increase the speed it takes to execute them. 
4. Conduct customer credit background checks: A thorough examination of a customer’s financial history can help inform how large a line of credit a customer can realistically take on, limiting the potential risk of delinquent accounts.   

Identifying DSO is only part of the battle when it comes to improving how quickly your company gets paid. Using a service like Nuvo can help resolve multiple pain points through automation and background checks. Learn more about what we can do for your business.

Days Sales Outstanding FAQ

DSO is an important concept in business operations. Below are answers to some common questions.

What Is a Good DSO for a Company?

Companies often strive for the lowest DSO possible, but what’s considered “good” is largely dependent on the industry in which they operate. Companies working with perishable goods often need a lower DSO than industries that operate with a longer shelf life.

Why Is DSO So important?

Tracking your company’s DSO is like diagnosing a symptom of a greater issue. As your DSO changes, you’ll know whether the changes you’ve made within your company are having a positive or negative impact.

Is DSO a KPI?

DSO is generally considered an important KPI. The DSO formula is applicable to all industries and can be used to compare the performance of one company to its competitors or the wider market.

What Other Metrics Do You Need to Analyze Along With the DSO?

Other important KPIs for businesses to take note of include:

• Bad debt to sales: measures how much in sales a company writes off due to failure to pay
• AR turnover ratio: measures the efficiency of a company at handling their collections

Collection effectiveness index: measures the percentage of receivables that are successfully collected over a set period of time.