Days Sales Outstanding (DSO)

The formula

DSO = (accounts receivable ÷ credit sales) × period days

(50,000 ÷ 600,000) × 365 = 0.0833 × 365 = 30.4 days.

Worked examples

$50,000 AR, $600,000 sales, 365 days → 30.4 days
$50,000 AR, $600,000 sales, 90 days → 7.5 days
$120,000 AR, $600,000 sales, 365 days → 73.0 days
$30,000 AR, $900,000 sales, 365 days → 12.2 days

Why use credit sales only

Cash sales never enter receivables, so including them makes the ratio look better than it is. A business that takes half its revenue in cash would show a DSO half the true collection period if total sales were used. Use the credit-sales figure, or total sales minus cash receipts, to keep the comparison honest.

What DSO tells you and what it does not

• It is a weighted average. One large slow payer can lift it while every other customer pays on time.
• It moves with seasonality. A peak sales month inflates receivables and the ratio together; compare like months.
• It does not age the book. A DSO of 45 could be everyone at 45 days or 90% at 30 and 10% at 180. An ageing report separates those.
• It has a cash cost. Each day of DSO ties up cash — 30.4 days on these figures is about $50,000 that could be funding the business instead.

Track it monthly rather than annually, since a rising trend is the early warning that collection is slipping long before bad debt appears.

The receivables turnover line is the same fact from the other side: 12 turns a year is a 30.4-day collection period, and the two move inversely. What the average hides is the distribution — one large customer paying at 120 days can lift DSO while every small account pays on time. An ageing report, not the average, shows whether the problem is a single account or a systemic terms issue.

Frequently Asked Questions