Days sales outstanding (DSO) is the time between when a credit sale is made and the cash is collected from that sale. It is one part of the cash conversion cycle (CCC) — the formula by which we measure how long it takes a company to turn its investments in inventory and other resources into cash from sales.

The longer the DSO, the longer cash is tied up in accounts receivable (AR). Since the CCC includes how long it takes to sell inventory, collect payment (DSO), and pay suppliers, improving DSO — by collecting payments faster — can improve cash flow.

How to calculate days sales outstanding

The formula for calculating days sales outstanding is:

Days Sales Outstanding = (Average Accounts Receivable ÷ Net Revenue) x 365 Days

• Average Accounts Receivable is the average amount of money customers owe the company over a certain period (usually calculated by taking the beginning and ending AR balances and dividing by two).
• Net Revenue is the total revenue from sales, minus any returns or discounts, over that same time period.
• And 365 represents the number of days in a year and converts the ratio into days.

What the formula shows is how many days, on average, it takes for the company to collect payment after a sale. For example, if the result is 45, that means it takes about 45 days to get paid.

Days sales outstanding calculation example

BrightTech Solutions is a mid-sized company that sells software to businesses. Most of its clients pay on credit, with terms of net 30.

Let’s say that during the first quarter of the year, BrightTech had:

• Beginning accounts receivable: $950,000
• Ending accounts receivable: $1,050,000
• Net revenue for the quarter: $6,000,000

First, we need to calculate the average accounts receivable: ($950,000 + $1,050,000) ÷ 2 = $1,000,000

Next, plug everything into the DSO formula:

DSO = ($1,000,000 ÷ $6,000,000) × 365

DSO = 0.1667 × 365 = 60.8 days

What this means is that BrightTech’s DSO is about 61 days, so it takes the company, on average, 61 days to collect payment after a sale. That’s twice as long as its 30-day terms, which may indicate issues with collections or customers paying late. At this point, the enterprise payments team will want to investigate why payments are so slow, and take the necessary steps to improve cash flow, such as following up on overdue invoices more strategically or adjusting their credit policies.

What days sales outstanding tells us

DSO provides valuable insight into a company’s cash flow. It tells you how long, on average, it takes to collect payment after a credit sale. Changes in the DSO can signal potential problems or proficiencies.

• A high DSO means the company is waiting a long time to get paid. This can strain cash flow, making it harder to pay bills or invest in growth. If DSO is rising, it may be a warning sign — customers could be unhappy, sales teams might be offering extended payment terms to close deals, or the company may be taking on customers with poor credit ratings.
• A sharp increase in DSO can create serious financial pressure. If cash isn’t coming in as expected, the company might have to delay payments, cut expenses or make some tough business decisions.
• A low DSO is generally what you want because it means the company is collecting payments quickly, improving cash flow and fostering the flexibility it needs to thrive and grow.

It’s also important to remember that DSO only measures credit sales. Cash sales aren’t included. If a company has a large volume of cash sales, its overall DSO will naturally be lower than a company that primarily operates on credit sales.

Finally, be sure to track your DSO over time. This allows you to spot trends. Are there seasonal patterns? Some businesses, e.g., those with seasonal sales, may regularly show DSO swings each year. This isn't necessarily a problem, unless the DSO becomes unpredictable or consistently increases, which may indicate deeper issues that need to be addressed.

What is a good days sales outstanding?

In general, the lower the DSO, the better. Most companies aim for a DSO under 45 days. However, what counts as a "good" DSO depends heavily on the industry.

For example, a DSO of 85 might be normal for a high-end industrial manufacturer that sells expensive equipment to commercial buyers. But the same number would be a red flag for a clothing retailer, where purchases are frequent and customers are expected to pay quickly.

It’s important to compare a company’s DSO to its own historical performance and industry benchmarks. In 2024, according to the results of a survey conducted by Zone & Co., the average DSOs by industry were:

• Distribution & Transportation: 41
• Energy & Utilities: 19
• Finance & Real Estate: 11
• Healthcare, Nonprofit & Government: 22
• Manufacturing & Construction: 21
• Retail, Food & Entertainment: 26
• Technology & Professional Services: 34

There are a few exceptions to the “lower is better” rule. If the business is seasonal or cyclical, you’ll often see fluctuations in DSO tied to the timing of their sales. And, while analyzing only credit sales would give the most accurate DSO, many public companies don’t break out credit versus cash sales in their financial statements.

How to lower days sales outstanding

Companies can employ a number of best practices that can help lower DSO, including:

• Setting and monitoring credit limits. Only extend credit to customers who meet the minimum credit standards for your company and review customers’ credit information regularly. AI tools can help assess customers’ credit risk.
• Automating invoicing. Manual invoices often contain mistakes. Automated systems, especially those using AI, generate accurate invoices by matching purchase orders and receipts to the correct invoice numbers. Sending invoices consistently (at the same time, in the same format, through the same channel), with clearly stated due dates and terms, encourages more timely payments.
• Considering shorter payment terms. Long payment windows can lead to delayed payments. If shortening payment terms makes sense for your industry, be sure to communicate the change clearly to your customers in advance.
• Offering early payment incentives. Offering customers a discount for paying early can speed up cash collection and strengthen customer loyalty.
• Sending automated reminders. Use automated emails to remind your customers of upcoming due dates and to follow up on late payments. Make sure your customer contact information is up to date.
• Talking to customers who are chronically late. A few customers who consistently pay late can significantly increase DSO. Reach out directly to understand the cause, and if necessary, consider ending the relationship if the risk outweighs the value.
• Resolving disputes promptly. Unresolved billing issues can delay payments. Have a standard process in place to resolve disputes. Be sure to keep customer service and sales in the loop.