Days sales outstanding

What it means

DSO says how many days on average a customer takes to pay. It comes from receivables and revenue, so the figure is available from the statements without any new system.

Comparing it to the payment terms on your invoices shows where the problem sits. DSO of 60 days on fourteen-day terms is not a contract problem but an absence of systematic chasing.

DSO is only one side of the cash cycle. Together with inventory days and payables days it makes up the cash conversion cycle, and a company with high DSO may be fine if it pays its own suppliers as late as its customers pay it.

How it works in practice

It is worth tracking by customer as well: the average hides three who pay on time and one dragging the whole figure. The sub-ledger of overdue balances is the source.

Cutting DSO frees cash without a cent more in sales. Automatic reminders help, as do deposits from new customers and factoring for large buyers with long terms.

In monthly reporting we calculate DSO on receivables cleaned of disputed and uncollectable amounts. Old invoices that nobody will pay belong in an allowance or a write-off; otherwise the figure climbs for years and management cannot see whether everyday payment discipline is improving.

What to watch out for

The measure can be distorted by year-end invoicing. A large invoice raised in December makes DSO at 31 December look bad although nothing changed in payment behaviour. Watch the trend, not one figure.

Put total revenue into the formula, cash and card sales through eKasa included, and DSO comes out low even though invoiced customers pay late. With mixed sales it is calculated on invoiced revenue only, or the measure hides exactly the problem it is meant to expose.