May 15, 2025
DSO, or day sales outstanding, is a means of monitoring the average amount of time in days that it takes for payment to be collected after a sale has been made. This DSO measure is normally calculated over a monthly, quarterly or annual basis.
A DSO is calculated by dividing average accounts payable in a set period by total value credit sales within that same period. The result will then be multiplied by the number of days within this accounting period of time.
Day Sales Outstanding is a component of the cash conversion cycle . It can also be known as average collection period or days receivables.
Day sales outstanding is the average time in days that it takes for payment to reach a company once a sale has been made.
If the DSO number for a company his high , then it indicates delays in payments received, which can translate into cash flow issues.
Conversely a low DSO shows prompt receipt of post sale payments, which money can be reinvested into the business.
As a rule of thumb any company with a DSO below 45 is considered low.
Cash flow is the lifeline of any business, and therefore it is prudent to collect accounts receivables quickly and efficiently. Companies always work on the basis that outstanding receivables will be paid. However when considered within the context of time value of money principle, the longer it takes for payment to be received is in effect money lost.
What constitutes "quick payment" can vary depending upon the industry. For example within the financial services industry longer payment terms are commonplace. By comparison within the agricultural and fuel industries fast payments are essential.
Smaller businesses tend to rely on a steady cash flow, more than larger diversified companies.
DSO=Total Credit Sales x Number of Days Accounts Receivable
Pro Tip: If a company can turn sales into cash quickly it gives them the opportunity to put the cash to use again quicker.
If a company shows a high DSO, that suggests they are using credit , and waiting longer periods of time for payment to be received. Potentially this can generate cash flow issues.
A low DSO shows a company if efficient in receiving its accounts receivable, this prompt receipt of cash can allow the creation of new business via re-investment.
SO the DSO, and the average time taken for outstanding balance to carried in receivables is a very good indicator of how healthy a company's cash flow is.
It must be noted that the DSO calculation formula only takes credit sales into account. Cash sales are not included as this can lead to a distortion of the figures. The DSO for a cash sale is in effect zero as payment is made immediately. Therefore if they were included it would lower the DSO, and a company with a high proportion of cash transactions would show a lower figure than those with a high percentage of credit sales.
The analysis of a DSO figure can be done in varying ways. It can indicate how efficiently the collections department operates, and how high customer satisfaction is. None credit worthy customers can also be identified via DSO.
Taking a single accounting period , and looking at a DSO value is a good way of quickly evaluating cash flow. However the figures are far more meaningful if they taken over a longer period of time. This allows us to see any trends or patterns emerging, and can provide a warning sign if a company is heading for trouble.
An increasing Days Sales Outstanding (DSO) is often a red flag indicating potential issues. It could signal declining customer satisfaction, sales teams offering extended payment terms to boost sales, or the company extending credit to customers with poor creditworthiness.
A significant rise in DSO can lead to severe cash flow challenges. If the company struggles to meet its own payment obligations on time, it might have to resort to drastic measures to stabilise its finances.
37.30 is the average DSO for companies across various industries in the third quarter of 2022.
When analysing a company’s cash flow, tracking its DSO over time is crucial to identify trends, whether it’s increasing, decreasing, or following specific patterns in the company's financial history.
Monthly variations in DSO are not uncommon, especially for businesses with seasonal products. While a fluctuating DSO might raise concerns, consistent dips during a specific season each year are typically not alarming. Instead, they may simply reflect the cyclical nature of the business.
While Days Sales Outstanding (DSO) is a useful metric when it comes to assessing how efficient a company is, it does have some limitations that investors need to be aware of.
When making a comparison between the cash flows of a number of companies using DSO, it is imperative that you focus on businesses within the same industry, with similar revenue levels and business models. Comparing companies across a variety of industries or different sizes can result in misleading conclusions. This is because the DSO benchmarks and targets they set are generally significantly different.
DSO is not all that useful if you are making a comparison between companies where there is a large difference in the amount of sales made on credit. The DSO of a business where a small proportion of the sales are made on credit does not tell you much about its cash flow. Comparing this type of company with one that has a large proportion of credit sales will also tell you little.
Furthermore, DSO is not a flawless measure of how efficient a company’s accounts receivable are. If sales volumes vary it can have an impact on the DSO, as when sales increase it will typically reduce the DSO Value.
Delinquent Days Sales Outstanding (DDSO) serves as a valuable alternative for evaluating credit collections or as a complementary measure alongside DSO. As with any performance metric, DSO should not be used in isolation but alongside other financial indicators.
It is a simple formula, as follows: Total number of accounts receivable in a designated period divided by total monetary value of credit sale within the same period. You then multiply the result by the number of days within this designated period.
The measure of what can be considered a good dso ratio can vary depending on the type of business you are considering , and the industry within which the company operates. Anything with a DSO less than 45 is deemed to be good for most industries and business sectors. This provides an indication that the company has a health cash flow, with fund being available for re-investment and new business generation.
So let us look at a company that made total credit sales of £1,500,00, with accounts receivable of £1,050,000 with a total day count of 92. The calculation would be:
If a company has a weak cash flow, this can present problems with re investment and driving the business forward. Whilst the figure varies, then generally accepted benchmark to indicate a good cash flow position is below 45. In order to make solid analysis it is best to track the dso over a period of time. This will show any patterns and fluctuations which may be of concern. An increasing DSO could mean that a company's collections department is not operating efficiently, or the company is selling to clients who'd credit risk is high, and not at an optimal level.
Atradius, a company who specialise in debt collection advice that tracking over time can incentivise a company to be proactive in recovering unpaid invoices. When looking a smaller businesses then daily sales which are outstanding can be used to target customers that are not promptly settling invoices , and consequently becoming a drain on the company.
In conclusion, the day sales outstanding number provides a very clear indicator of how well and efficiently a company is operating, and how healthy the cash flow is for a myriad of different business and industry sectors. A high or increasing DSO number can ultimately negatively impact on the businesses own day to day operation. Thus meaning its own outstanding payments are delayed.
In any scenario it is safe to say that any delay to a cash inflow is cash that it lost to your business.
