Days Sales Outstanding

DSO shows how quickly a company turns its sales on credit into cash. It is usually calculated by dividing accounts receivable by revenue and multiplying by the number of days in the period, often 365 for a year.

For example, a company with accounts receivable of 400,000 and annual revenue of 2 million has a DSO of 73 days. On average, it waits about ten weeks to be paid.

A lower DSO means customers pay faster, so cash is available sooner. A rising DSO may indicate that customers are struggling financially, that the company has relaxed its credit terms to boost sales or that its collection process is weak.

DSO should be compared with the company's payment terms. If customers are given 30 days to pay but DSO is 73, many are paying late. Comparisons with competitors are also useful, since typical payment terms vary by industry.

DSO is one component of the cash conversion cycle. Reducing it, for example by invoicing promptly, chasing overdue accounts and offering incentives for early payment, can free up significant cash.