Days Sales Outstanding (DSO): What It Is and How to Reduce It
Days Sales Outstanding (DSO) measures, on average, how many days it takes you to collect payment after issuing an invoice. It’s one of the clearest single numbers for tracking whether your collections process is getting better or worse over time.
The formula
DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days in the Period. In plain terms: take what’s currently owed to you, divide by how much you invoiced over the period, and multiply by the number of days in that period.
A worked example
If you invoiced $60,000 over a 90-day quarter and currently have $12,000 in outstanding accounts receivable, DSO = ($12,000 ÷ $60,000) × 90 = 18 days. On average, it’s taking about 18 days from invoice to payment.
What counts as a good DSO
A useful benchmark isn’t a fixed number — it’s your DSO relative to your stated payment terms. If your standard terms are Net 30 and your DSO is sitting around 25–35, collections are working roughly as intended. A DSO significantly higher than your terms (say, 55 on Net 30 terms) signals a real collections gap worth addressing.
How to reduce it
Most improvements to DSO come from the same levers that speed up any collection:
- Invoice immediately, not in a batch
- Send reminders before the due date, not just after
- Offer faster, lower-friction payment methods
- Tighten terms for clients with a history of paying slowly
- Follow up consistently on invoices as soon as they cross into overdue
DSO vs an aging report
DSO gives you one number summarizing overall collection speed — useful for tracking a trend over time. An aging report shows the detail behind that number, breaking outstanding invoices down by client and by how overdue each one is. Use DSO to spot that something’s off, and an aging report to find exactly where.
FAQ
What’s considered a bad DSO?
It depends entirely on your payment terms, but a DSO that runs well beyond your stated terms — for example, 60+ days on Net 30 terms — generally indicates a real collections problem rather than normal variation.
Can DSO be too low?
Not typically in a way that’s a problem — a very low DSO usually just means clients pay quickly relative to your terms, which is a good outcome, not a warning sign.
How often should I calculate DSO?
Monthly or quarterly is common — frequent enough to catch a worsening trend early, without over-reacting to short-term noise from one large invoice or one slow client.
Does DSO account for invoices that will never be paid?
Only if they’re still sitting in accounts receivable — once an invoice is written off as bad debt, it should be removed from AR, which will also correct the DSO calculation going forward.
Put this into practice with a real invoice.
Try the free Invoice GeneratorRelated Guides
- Accounts Receivable Turnover Ratio: What It Is and How to Calculate It
What the accounts receivable turnover ratio is, how to calculate it with a worked example, what counts as a good ratio, and how to improve collections.
- Invoice Aging Report: What It Is and How to Use One
Learn what an invoice aging report is, how to read the aging buckets, and how to use it to prioritize collections and get paid faster — with a sample report.