Days sales outstanding (DSO)

The formula

• DSO = d · AR / S

AR is the accounts receivable at the end of the period, S the credit sales during it and d the days in it. The ratio AR / S is the share of a period’s sales still unpaid; multiplied by the period’s length it becomes days.

A worked example

Receivables of 150,000 at the end of a year with credit sales of 1,095,000: DSO = 365 · 150,000 / 1,095,000 = 50 days. On average a customer pays fifty days after the invoice. Turned round, a company with 1,095,000 of credit sales that collects in 30 days carries about 90,000 of receivables.

What the number says

Set the DSO against the payment terms. Terms of 30 days and a DSO of 50 mean customers pay twenty days late on average, or that a few large ones pay very late. A rising DSO with flat sales means cash is being lent to customers; it is the earliest sign of collection trouble, and the reason the figure is watched month by month.

Its place in the cash cycle

DSO is one of three day counts. Days inventory outstanding is how long goods wait to be sold, days payable outstanding how long the company takes to pay its own suppliers. DIO + DSO − DPO is the cash conversion cycle: the days the company’s cash is tied up between paying and being paid.

Common mistakes

• Using total sales when part is for cash. Cash sales create no receivable and dilute the figure.
• Mixing a quarter’s sales with 365 days. The days and the sales have to cover the same period.
• Taking the year-end receivable as typical. For a seasonal business an average balance says more.

Frequently asked questions