A Guide to Day Sales Outstanding

Day Sales Outstanding (DSO) measures the average number of days it takes a company to collect payment from its customers after a sale has been made. It is a crucial metric for evaluating a company’s cash flow and financial stability and is based on credit sales. For instance, if a company has a DSO of 30 days, it means, on average, customers take a month to settle their invoices. If that number jumps to 60 or 90 days, the company may be struggling with late payments, which can create cash flow issues and limit growth opportunities.

When calculating DSO, it’s important to understand that while a rising DSO could signal a collection problem, it’s essential to pair this metric with others, like your accounts receivable turnover, to get a fuller picture of your business’s financial health. This way, you don’t just focus on DSO but also keep track of the broader patterns and trends that impact cash flow.

Calculating DSO is straightforward, but it requires accurate tracking of accounts receivable and sales data. Regularly calculating DSO allows businesses to identify trends and take corrective action when necessary.

Example Calculation of DSO:
To further illustrate, let’s say a manufacturing company has $200,000 in outstanding invoices and has made $1,000,000 in credit sales in the past 60 days. Using the formula:

(200,000 / 1,000,000) × 60 = 12 days

This means the company, on average, collects payments within 12 days of issuing an invoice. If this number starts rising, it could indicate slower customer payments and potential cash flow challenges.

This regular calculation is crucial—if you're working with a net 30 cycle, it’s a good practice to calculate DSO at least every 30 days. This keeps you proactive and allows you to identify any trends or issues that could arise. If you notice an upward trend, you can address potential problems before they escalate into bigger cash flow issues.

The standard DSO formula is:

(Accounts Receivable / Total Credit Sales) × Number of Days in Period

For example, if a company has $150,000 in accounts receivable and $600,000 in credit sales over a 30-day period, the DSO calculation would be:

(150,000 / 600,000) × 30 = 7.5 days

This means it takes an average of 7.5 days to collect payment from customers.

Again, it’s crucial to track this over time, especially if you have different terms in place for different customers or segments. This helps you understand how efficiently your collections process is working and gives you insight into whether adjustments are needed.

Yes. While the standard formula is widely used, businesses may tweak their approach based on specific needs. Some companies calculate DSO on a rolling 12-month basis to get a broader view of cash flow trends, while others exclude large one-off sales to get a more accurate picture of typical receivables. By adjusting the formula to fit your company’s specific context, you can ensure the results reflect your business dynamics more accurately.

DSO is a critical indicator of a company’s financial health and efficiency in collecting payments. A high DSO can signal cash flow problems, while a low DSO suggests customers are paying on time. Here’s why DSO matters:

• Cash flow management: Businesses rely on steady cash flow to cover expenses like payroll, rent, and inventory. A high DSO can create cash shortages, making it difficult to meet these obligations.

• Credit tisk assessment: A rising DSO may indicate that customers are struggling financially, increasing the risk of bad debt.

• Operational efficiency: Monitoring DSO helps businesses identify inefficiencies in their invoicing and collections processes.

If your DSO is rising, it could point to several issues: maybe your invoicing system is inefficient, or perhaps you need to review your credit policies. Either way, understanding these underlying causes is key. And for growing businesses especially, maintaining a strong grasp on cash flow is essential. Cash flow isn’t just about keeping the lights on—it’s a tool that can fuel your reinvestment strategy or help you pay down debt more efficiently.

Understanding whether your DSO is good or bad depends on industry benchmarks and company-specific goals.

• High DSO: A high DSO means customers are taking a long time to pay. This could be due to ineffective credit policies, poor follow-ups, or customers facing financial difficulties. Businesses with high DSO may need to borrow money or delay payments to their own suppliers, which can increase costs and strain relationships.
  Example: If a construction company has a DSO of 90 days while its industry average is 45 days, it may struggle to buy new materials or hire staff for upcoming projects.

• Low DSO: A low DSO indicates that customers pay quickly, which is typically a good sign. However, an extremely low DSO could mean a company is too restrictive with credit, potentially turning away potential customers who require longer payment terms.

This balance is key to improving both your customer relationships and cash flow. Lowering your DSO is great, but if you’re too aggressive in collecting payments, it could alienate potential customers, ultimately hurting your growth. So, understanding the optimal range for your business is essential.

Yes, DSO can vary significantly across industries due to differences in payment terms and customer expectations. For example:

• Retail businesses often have lower DSO because most transactions are completed at the point of sale.

• Manufacturing and construction companies tend to have higher DSO since they work with longer billing cycles and project-based contracts.

• Service-based industries may experience fluctuating DSO depending on contract terms and client payment practices.

Understanding how your DSO compares to industry standards is a great way to measure your performance. For example, retail businesses typically experience much quicker payments due to their transaction models, while industries like construction tend to deal with longer payment cycles. By comparing your DSO to industry averages, you can set more realistic targets for your collections process.

Business size can impact DSO in several ways:

• Small businesses may experience higher DSO if they lack strong credit management policies or have less leverage in negotiating payment terms.

• Large corporations often have structured credit policies, automated invoicing, and dedicated collections teams, leading to lower DSO.

• Rapidly growing businesses might see DSO increase if they extend more credit to customers without adjusting collection processes accordingly.

Regardless of size, businesses should actively manage DSO to maintain healthy cash flow.

Reducing DSO requires proactive credit management. Here are some strategies to improve DSO:

• Invoice promptly: Send invoices immediately after delivering a product or service.

• Offer incentives: Discounts for early payments can encourage customers to pay faster.

• Use business credit reports: Creditsafe’s Business Credit Reports provide insights into a company’s payment history, helping businesses determine credit terms before offering trade credit.

• Automate collections: Automated reminders and follow-ups can help ensure customers don’t forget their due dates.

Top tip: The key to reducing DSO is proactivity. Many businesses take a reactive approach, waiting until invoices are overdue to follow up. But the most successful teams engage with customers earlier—checking in on the invoice within a week or two of delivery. This proactive approach helps prevent delays and keeps cash flowing.

Lowering DSO benefits businesses in several ways:

• Improves cash flow: Faster payments mean more liquidity to cover operational costs, payroll, and growth initiatives.

• Reduces bad debt risk: The longer an invoice remains unpaid, the higher the chance of non-payment.

• Strengthens supplier relationships: Consistent cash flow enables businesses to pay suppliers on time, maintaining strong partnerships.

• Enhances financial stability: A lower DSO indicates efficient credit management, making the company more attractive to investors and lenders.

DSO doesn’t just impact cash flow—it can affect many aspects of a business, including:

• Profitability: If too much cash is tied up in unpaid invoices, companies may need to take on debt or delay investments.

• Supplier relationships: If a company struggles to pay its suppliers on time due to high DSO, it could damage relationships and lead to stricter credit terms.

• Business growth: Cash flow constraints from a high DSO can limit a company’s ability to expand, hire new employees, or invest in new projects.

DSO is closely tied to accounts receivable management. Companies that actively monitor outstanding invoices and follow up on late payments typically have a lower DSO.
Creditsafe’s Company Monitoring service alerts businesses to changes in a customer’s financial health, helping them mitigate credit risk before it becomes a problem.

Yes, businesses can use DSO to estimate future accounts receivables and anticipate cash flow. By analyzing historical DSO trends, a company can predict how long it will take to collect outstanding invoices.

For instance, if a company’s average DSO is 45 days, and they have $500,000 in credit sales this month, they can expect to receive those payments in about 45 days. This forecasting helps businesses plan for expenses, investments, and potential funding needs.

Many businesses make avoidable mistakes when managing DSO, such as:

• Ignoring overdue invoices and only chasing payments when cash flow becomes an issue.

• Extending credit without checking credit history, leading to payment delays and bad debt.

• Failing to adjust credit policies, especially when customers' financial situations change.

Managing DSO effectively starts with knowing who you’re doing business with. Creditsafe’s Business Credit Reports provide real-time data to help companies make smarter credit decisions.

• Improve cash flow: Our reports include payment indicators and Days Beyond Terms (DBT) metrics, helping businesses predict when they will get paid.

• Reduce bad debt: With business credit scores and limits included, companies can assess financial stability before extending credit.

• Verify customers and suppliers: Every report allows businesses to confirm registered details, addresses, and legal status to prevent fraud.

• Collect trade references: Creditsafe reports include multiple tradelines and payment experiences, giving businesses a complete view of a company’s payment history.

• Identify company ownership: Our reports include group structure and Ultimate Beneficial Owner (UBO) details, ensuring transparency in business dealings.

Day Sales Outstanding is a powerful tool for managing cash flow and ensuring financial stability. By monitoring DSO, improving credit policies, and leveraging Creditsafe’s Business Credit Reports, businesses can protect themselves from cash flow issues, reduce risk, and operate more efficiently.

Want to check the creditworthiness of your customers and suppliers? Get a free business credit report today and join over 120,000 companies worldwide that trust Creditsafe.