## What is Days Sales Outstanding (DSO)?

**Days Sales Outstanding (DSO)** is a metric used to gauge how effective a company is at collecting cash from customers that paid on credit.

DSO measures the number of days it takes on average for a company to retrieve cash payments from customers that paid using credit – and the metric is typically expressed on an annual basis for comparability.

In This Article

- What does the days sales outstanding (DSO) metric measure?
- What is the days sales outstanding (DSO) formula?
- In terms of the impact on free cash flows, would a higher or lower DSO be preferred?
- Why is it important to benchmark the DSO of a company against its industry peers?

Table of Contents

- How to Calculate Days Sales Outstanding (DSO)
- Interpreting DSO – Higher or Lower?
- Days Sales Outstanding (DSO) Formula
- Methods to Lower Days Sales Outstanding (DSO)
- DSO Calculator – Excel Template
- DSO Example Calculation
- Accounts Receivable Projection Using DSO

## How to Calculate Days Sales Outstanding (DSO)

The accounts receivable (A/R) line item on the balance sheet represents the amount of cash owed to a company for products/services “earned” (i.e., delivered) under accrual accounting standards but paid for using credit.

More specifically, the customers have more time after receiving the product to actually pay for it.

Since days sales outstanding (DSO) is the number of days it takes to collect due cash payments from customers that paid on credit, a lower DSO is preferred to a higher DSO.

- A low DSO implies the company can convert credit sales into cash relatively fast, and the duration that receivables remain outstanding on the balance sheet before collection is shorter.
- But a high DSO indicates the company is unable to quickly convert credit sales into cash, and the longer that the receivables remain outstanding, the less liquidity the company has.

The reason DSO matters when evaluating a company’s operating efficiency is that faster cash collections from customers directly leads to increased liquidity (more cash), meaning more free cash flows (FCFs) that could be reallocated for different purposes rather than being forced to wait on the cash payment.

## Interpreting DSO – Higher or Lower?

As a general rule of thumb, companies strive to minimize DSO since it implies the current payment collection method is efficient.

If DSO is increasing over time, this means that the company is taking longer to collect cash payments from credit sales.

On the other hand, DSO decreasing means the company is becoming more efficient at cash collection and thus has more free cash flows (FCFs).

Recall that an increase in an operating working capital asset is a reduction in FCFs (and the reverse is true for working capital liabilities).

That said, an increase in A/R represents an outflow of cash, whereas a decrease in A/R is a cash inflow since it means the company has been paid and thus has more liquidity (cash on hand).

- Low DSO ➝ Efficient Cash Collection from Credit Sales (Higher Free Cash Flow)
- High DSO ➝ Inefficient Cash Collection from Credit Sales (Less Free Cash Flow)

## Days Sales Outstanding (DSO) Formula

The calculation of days sales outstanding (DSO) involves dividing the accounts receivable balance by the revenue for the period, which is then multiplied by 365 days.

## DSO Formula

- Days Sales Outstanding (DSO) = (Average Accounts Receivable / Revenue) * 365 Days

Let’s say a company has an A/R balance of $30k and $200k in revenue. If we divide $30k by $200k, we get .15 (or 15%).

We then multiply 15% by 365 days to get approximately 55 for DSO. This means that once a company has made a sale, it takes ~55 days to collect the cash payment.

During this waiting period, the company has yet to be paid in cash despite the revenue being recognized under accrual accounting.

The product/service has been delivered to the customer, so all that remains is for the customer is to hold up their end of the bargain by actually paying the company.

Similar to the calculation of days inventory outstanding (DIO), the average balance of A/R could be used (i.e., the sum of the beginning and ending balance divided by two) to match the timing of the numerator and denominator more accurately.

But the more common approach is to use the ending balance for simplicity, as the difference in methodology rarely has a material impact on the B/S forecast.

###### DSO by Industry

The exception is for very seasonal companies, where sales are concentrated in a specific quarter, or cyclical companies where annual sales are inconsistent and fluctuate based on the prevailing economic conditions.

It is technically also more accurate to only include sales made on credit in the denominator rather than all sales.

But again, this is rather rare in practice since not all companies disclose the sales made on credit and the timing, which is important because DSO does not provide much insight as a standalone metric.

For example, a DSO of 85 days could be the industry standard in a high-end industrial products manufacturer with commercial customers, expensive pricing, and low-frequency purchases, whereas 85 days would be a concerning figure for a company in the clothing retail industry.

For this clothing retailer, it is probably necessary to change its collection methods, as confirmed by the DSO lagging behind that of competitors.

## Methods to Lower Days Sales Outstanding (DSO)

For companies with DSOs higher than that of their industry comparables, some methods to lower the DSO would be to:

- Decline Payments via Credit (or Offer Incentives such as Discounts for Cash Payments)
- Identify Customers with Repeated History of Delayed Payments (Place Targeted Restrictions – e.g., Require Upfront Cash Payments)
- Perform Customers Credit Background Checks – Relevant for Installment Payment Agreements

However, in certain cases, extended DSOs could be a function of a customer making up a significant source of revenue for the company, which enables them to push back their payment dates (i.e., buyer power and negotiating leverage).

Thus, it is important to not only diligence industry peers (and the nature of the product/service sold) but the customer-buyer relationship.

For example, a major customer that has a track record of delayed payments is not considered as problematic, especially if the relationship with the customer is long-term and there have never been any past concerns of this particular customer not paying.

## DSO Calculator – Excel Template

A/R is ordinarily forecasted based on days sales outstanding (DSO). To get started with this exercise, download the file using the form below to follow along:

## DSO Example Calculation

In our hypothetical scenario, we have a company with revenues of $200mm in 2020. Throughout the projection period, revenue is expected to grow 10.0% each year. The first step to projecting accounts receivable is to calculate the historical DSO. The DSO for 2020 can be calculated by dividing the $30mm in A/R by the $200mm in revenue and then multiplying by 365 days, which comes out to 55. This means that on average, it takes the company roughly ~55 days to collect cash from credit sales.

Here, we only have a single data point to work with (2020 DSO = 55 days), but for modeling on the job, it is ideal to take a close look at historical trends over multiple years.

If the DSO has remained consistent year-over-year, then you could simply extend the DSO assumption to future years (i.e., link to the cell on the left). Or, you can take the average of the past couple of years to normalize for any minor cyclicality.

But if DSO has been trending upward or downward, this would warrant a more in-depth look into what is happening internally at the company.

If a company is making progress towards becoming more efficient at collecting payments, then A/R days should gradually continue to decrease over time.

However, the cause of the decrease in DSO should be identified before blindly carrying the assumption forward.

In addition, as a sanity check, DSO assumptions should also be referenced against the average DSO of comparable peers.

## Accounts Receivable Projection Using DSO

Now, we can project A/R for the forecast period. To do so, we will divide the carried-forward DSO assumption (55 days) by 365 days and then multiply it by the revenue for each future period. For example, A/R is forecasted to be $33mm in 2021, which was calculated by dividing 55 days by 365 days and multiplying the result by the $220mm in revenue.

The completed output for the A/R projections from 2021 to 2025 is as follows:

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## FAQs

### How do you calculate days sales outstanding DSO? ›

How is DSO calculated? **Days Sales Outstanding = (Accounts Receivable/Net Credit Sales)x Number of days**.

### Which is better higher DSO days sales outstanding or lower? ›

Since days sales outstanding (DSO) is the number of days it takes to collect due cash payments from customers that paid on credit, **a lower DSO is preferred to a higher DSO**.

### What does DSO mean in sales? ›

**Days Sales Outstanding** (DSO) is the average number of days taken by a firm to collect payment from their customers after the completion of a sale.

### Is DSO the same as days sales in receivables? ›

The key difference between the two is that the receivables turnover ratio measures how many times a business's receivables are turned over in a given period of time, while **DSO measures the average number of days it takes to collect on receivables**.

### What is DSO and how is it calculated? ›

Days Sales Outstanding (DSO) represents the average number of days it takes credit sales to be converted into cash or how long it takes a company to collect its account receivables. DSO can be calculated by **dividing the total accounts receivable during a certain time frame by the total net credit sales**.

### What is a good DSO ratio? ›

Why Is DSO Important? A high DSO number can indicate that the cash flow of the business is not ideal. It varies by business, but a number **below 45** is considered good.

### Why is reducing DSO important? ›

Unless you're in the business of lending people money – you should reduce your DSO. DSO measures the number of days it takes to collect a dollar of sales. It's the average age of your accounts receivable — **if your average is trending higher, then your business is more likely to struggle with cash flow**.

### Why is days sales outstanding important? ›

DSO is important because **it represents the number days a business holds debt on their books and can impact cash flow**. DSO, or days sales outstanding, is the length of time a business takes to get paid after invoicing.

### How can I improve my DSO days? ›

**Need Cash Sooner?**

**5 Ways to Reduce Your Days Sales Outstanding (DSO) and Have A Reliable Cash Flow**

- At the core of high-performing companies is a tightened focus on financial health. ...
- Set realistic expectations. ...
- Deal with unpaid invoices. ...
- Streamline invoice management. ...
- Perform credit evaluations. ...
- Define payment terms.

### How do you calculate DSO for 3 months? ›

The DSO is calculated as follows: **total open receivables last 3 months / 3) x 30 divided by total monthly sales last 3 months /3**.

### How do you calculate days sales? ›

How to calculate Days Sales Outstanding. You can calculate DSO by taking your Current Accounts Receivables Balance, dividing it by your Credit Sales Revenue During Measured Period, then multiplying that number by the Number of Days in Measured Period.

### How do you calculate DSO for 12 months? ›

Calculate a DYNAMIC rolling 12-month value by way of calculation –> DSO = Average (Total Receivables) / Sum (Gross Sales). This value should change relative to the month selected, for any 12 months depending on the date selected.

### Is DSO the same as average collection period? ›

**The days sales outstanding calculation, also called the average collection period or days' sales in receivables**, measures the number of days it takes a company to collect cash from its credit sales. This calculation shows the liquidity and efficiency of a company's collections department.

### What is a good days payable outstanding? ›

A DPO of 17 means that on average, it takes the company 17 days to pays its suppliers. DPO can be thought of in a few ways. In general, high DPOs are looked at favorably. It indicates that **the firm is able to use cash (that would have gone to immediately paying suppliers) for other uses for an extended period of time**.

### What is a good days in accounts receivable? ›

If a company offers a 30-day credit period, then an AR day number within **37—38 days (25% above the limit)** signifies some room for improvement. On the other hand, if the AR days are much lower than the credit period, the credit terms might be too strict.

### What is a good a R turnover ratio? ›

In general, a higher accounts receivable turnover ratio is favorable, and companies should strive for at least a ratio of **at least 1.0** to ensure it collects the full amount of average accounts receivable at least one time during a period.

### Is a higher or lower DPO better? ›

A company with a **higher value of DPO** takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to use those funds in a better way to maximize the benefits.

### How much cash could be saved with a 5 day improvement in DSO? ›

Improving Cash Flow by Reducing DSO

If XYZ Company can reduce its DSO by just 5 days, it can free up **almost $283,000** in cash flow.

### How do you control outstanding? ›

**6 Ways to Reduce Outstanding Receivables**

- Send the invoice immediately. ...
- Be clear about your payment terms on the invoice. ...
- Send a gentle reminder to the customer before the invoice due date. ...
- Initiate action as soon as the invoice is overdue.

### What is DSO in debt collection? ›

What is DSO? DSO – which stands for days sales outstanding – is **a measure of the average number of days that companies take to collect payment after a sale**.

### How do you calculate DSO for 3 months? ›

The DSO is calculated as follows: **total open receivables last 3 months / 3) x 30 divided by total monthly sales last 3 months /3**.

### How do I calculate days outstanding in Excel? ›

Then to calculate the days outstanding, in a separate column again, type in the formula: **= IF(TODAY()>E2,TODAY()-E2,0)**. From there, it should calculate the amount of days outstanding for overdue invoices. For invoices not due, it will return 0.

### What is the formula for calculating sales per day? ›

**Divide your sales generated during the accounting period by the number of days in the period** to calculate your average daily sales. In the example, divide your annual sales of $40,000 by 365 to get $109.59 in average daily sales.

### How do you calculate DSO for 12 months? ›

Calculate a DYNAMIC rolling 12-month value by way of calculation –> DSO = Average (Total Receivables) / Sum (Gross Sales). This value should change relative to the month selected, for any 12 months depending on the date selected.

### Why is Days Sales Outstanding important? ›

DSO is important because **it represents the number days a business holds debt on their books and can impact cash flow**. DSO, or days sales outstanding, is the length of time a business takes to get paid after invoicing.

### How can I improve my DSO? ›

**Need Cash Sooner?**

**5 Ways to Reduce Your Days Sales Outstanding (DSO) and Have A Reliable Cash Flow**

- At the core of high-performing companies is a tightened focus on financial health. ...
- Set realistic expectations. ...
- Deal with unpaid invoices. ...
- Streamline invoice management. ...
- Perform credit evaluations. ...
- Define payment terms.

### How do you calculate days sales in accounts receivable? ›

The days' sales in accounts receivable can be calculated as follows: **the number of days in the year (use 360 or 365) divided by the accounts receivable turnover ratio during a past year**.

### How do you calculate average days outstanding on a loan? ›

How Do You Calculate DSO? The DSO equation is **dividing the average accounts receivable during the time period by the total value of credit sales during the time period.** **Then multiply the result by how many days are in the time period**.

### How do you calculate days outstanding in accounts payable? ›

To calculate days of payable outstanding (DPO), the following formula is applied: **DPO = Accounts Payable X Number of Days/Cost of Goods Sold (COGS)**.

### How do you create a 30 day formula in Excel? ›

**In cell C1, type =A1+30, and then press RETURN** . This formula adds 30 days to the date in cell A1.

### How do I calculate the number of days between two dates? ›

To calculate the number of days between two dates, you need to **subtract the start date from the end date**. If this crosses several years, you should calculate the number of full years. For the period left over, work out the number of months. For the leftover period, work out the number of days.

### How is monthly DSO calculated? ›

You can calculate DSO by **taking your Current Accounts Receivables Balance, dividing it by your Credit Sales Revenue During Measured Period, then multiplying that number by the Number of Days in Measured Period**.

### How do I calculate total sales in Excel? ›

**Enter "=sum(B1:B#)" in the next empty cell in the B column, and replace "#" with the row number of the last filled cell in column B**. In the example, you would enter "=sum(B1:B2)" in cell B3 to calculate the total sales of the two items.