Proposals · Glossary
What is days sales outstanding (DSO)?
Days sales outstanding, or DSO, is the average number of days it takes a business to collect payment after a sale on credit. It is worked out by dividing accounts receivable by credit sales for a period and multiplying by the days in that period. A rising DSO means customers are taking longer to pay.
Most small businesses feel slow payment before they can measure it. DSO turns that feeling into one number that can be compared month to month and against the payment terms on the invoices.
Nuwan Madhusanka · Co-founder
4 min read · Published
| Quarter | Credit sales | Receivables at quarter end | DSO |
|---|---|---|---|
| July to September | $108,000 | $24,000 | 20 days |
| October to December | $96,000 | $32,000 | 30 days |
| January to March | $120,000 | $26,000 | 19.5 days |
| Formula | Receivables divided by credit sales, times 90 |
What the number measures
DSO turns the money owed to you into time. Accounts receivable is a balance in dollars; DSO says how many days of sales that balance represents. If a business sells $1,200 a day on credit and is owed $24,000, it is carrying twenty days of sales in unpaid invoices. Compared with the payment terms on those invoices, the number shows whether customers are paying on time: twenty days against 14 day terms means most customers are paying late.
How to calculate it
Take the receivables balance at the end of a period, divide it by the credit sales made in that period, and multiply by the number of days in it. In the worked table, $24,000 divided by $108,000 is 0.222, and multiplied by 90 days gives 20 days. Accounting textbooks often use the average of opening and closing receivables and a full year of 365 days, calling it the number of days' sales in receivables. Either version works if you use it consistently.
How to read the result
Look at the trend and the gap to your terms, not at the number alone. In the table, the jump to 30 days in the December quarter is a warning: either a large customer paid late or invoices went out late during the holidays. The fall back to 19.5 days in March shows it was corrected. A DSO consistently well above your stated terms means the terms are not being enforced, and reminders or a shorter term may fix more than chasing individual invoices.
Common mistakes
Including cash sales, which pay immediately and make DSO look better than it is. Using a month with one unusually large invoice, which swings the number. Comparing your DSO with a big company's published figure, when their customers and terms are different. And forgetting that invoicing late increases the number of days the money is out as much as paying late does, even though DSO only starts counting once the invoice is raised.
Where it shows up in the product
Invoices in the proposals module carry a status that runs draft, issued, sent, viewed, overdue, paid or void, so what is outstanding is the issued, sent, viewed and overdue invoices. An invoice turns overdue the day after its due date, reminders can be set per invoice with the gentle, standard or firm preset, and card payments through the pay link land in the owner's connected Stripe account. Bank transfers are marked paid by hand, so mark them promptly or the outstanding list will overstate what you are owed.
Questions people ask
What is a good DSO for a small business?
One close to your own payment terms. If you invoice on 14 day terms, a DSO of 15 to 20 days means customers mostly pay on time. There is no universal good figure, because a business on 30 day terms with government customers will always look slower than a cafe with a few catering accounts. Track your own trend instead.
Should I use 30, 90 or 365 days in the formula?
Use the length of the period whose sales you divide by. Monthly sales go with about 30 days, quarterly sales with 90 and annual sales with 365. Mixing them, such as dividing by one month of sales and multiplying by 365, produces a figure twelve times too large. Pick one period and keep it for every comparison.
Does DSO include overdue invoices only?
No. It includes everything owed by customers at the end of the period, whether or not it is due yet. That is why invoices issued in the last week of a period push DSO up even when nobody is late. Some businesses also track the overdue part separately, which isolates late payment from normal credit.
How can a business lower its DSO quickly?
Invoice the day the work finishes, put a due date rather than a vague term on every invoice, make card payment possible from the invoice itself, take deposits on larger jobs and send reminders on a fixed schedule. Each removes days from the cycle without needing tougher conversations with customers who would have paid anyway.
Is DSO the same as accounts receivable turnover?
They measure the same thing from opposite sides. Receivables turnover is how many times the receivables balance is collected in a year, credit sales divided by average receivables. Days sales outstanding converts that into days by dividing 365 by the turnover. A turnover of 12 is a DSO of about 30 days.
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Create a proposal with OneCraftRelated questions
- What is accounts receivable?What is accounts receivable: the money customers owe for work already delivered, how it sits on a balance sheet, how ageing works, and a worked example.
- What is an overdue invoice?What is an overdue invoice: an unpaid invoice past its due date, when it becomes overdue, a reminder ladder by days late, and the UK and Australian rules.
- What is invoice factoring?What is invoice factoring: selling unpaid invoices to a financier for cash now, how the advance and fees work, recourse, and factoring vs discounting.
- What are EOM payment terms?What EOM payment terms mean: credit counted from the end of the invoice month, with worked due dates for net 30, 30 days EOM and 7 days EOM.
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