What is days sales outstanding (DSO)?

Days sales outstanding (DSO) is the average number of days it takes a business to collect payment after a sale. It is calculated as accounts receivable divided by credit sales for a period, multiplied by the number of days in that period.

How it is calculated

DSO = accounts receivable / credit sales for the period × days in the period

Use credit sales only. Cash and card sales collected on the spot have no receivable and would make DSO look better than it is. Some people use average receivables for the period instead of the closing balance, which smooths out a large invoice issued on the last day.

How it is used

Compare DSO with the payment terms. If terms are net 30 and DSO is 45, customers are paying about two weeks late on average. A rising DSO is an early warning that cash will get tighter even while sales look healthy.

Worked example

Quarter 1Quarter 2
Credit sales for the quarter$270,000$270,000
Accounts receivable at quarter end$60,000$81,000
Days in the quarter9090
DSO20 days27 days

Quarter 1: $60,000 / $270,000 × 90 = 20 days. Quarter 2: $81,000 / $270,000 × 90 = 27 days. Sales were flat, but $21,000 more is now waiting to be collected.

Common mistakes

  • Including cash sales, which lowers DSO artificially.
  • Comparing periods of different lengths without changing the days figure.
  • Reading DSO alone. An average hides one customer who is 90 days late. Check the AR aging too.
  • Seasonal distortion. A big month at quarter end raises receivables and DSO even if every customer pays on time.

Related terms

  • AR aging (accounts receivable aging): An accounts receivable (AR) aging is a report that lists unpaid customer invoices grouped by how long they have been outstanding, typically current, 1 to 30, 31 to 60, 61 to 90 and over 90 days past due.
  • 13-week cash flow forecast: A 13-week cash flow forecast is a week-by-week projection of the cash coming in and going out of a business over the next quarter, starting from today's bank balance.
  • Forecast vs actual: Forecast vs actual is the comparison of what a forecast said would happen with what actually happened over the same period, line by line.

Further reading