Definition DSO: Explanation, Calculation and Tips to Improve It

The definition DSO is straightforward: it stands for Days Sales Outstanding and measures the average number of days it takes for your invoices to be paid. This abbreviation is an important indicator of the health of your cash flow and your overall credit management process.

A low DSO ratio means you receive payments quickly. A high DSO, however, can point to risks in your accounts receivable, such as long payment terms or challenging collections. In this guide, you will learn what is DSO, how the DSO formula works, and how you can reduce it with practical steps.

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What is DSO?

The definition DSO originates from financial management and credit management. It is one of the most widely used KPIs to measure how quickly customers pay their outstanding invoices after a product or service has been delivered. DSO is also known as DSO Days Sales Outstanding or the accounts receivable turnover in days.

Put simply: the lower your DSO, the faster you get paid. This is beneficial for your liquidity and reduces the risk of bad debts. A high DSO can lead to cash flow challenges.

Why is DSO Important?

DSO is more than just a figure in your accounting records. It provides insight into:

• Liquidity: How quickly cash becomes available.
• Risk management: The longer the payment term, the higher the risk of unpaid invoices.
• Growth potential: A low DSO frees up financial resources for investment.

A DSO analysis helps you identify trends in payment behaviour. If you notice your DSO increasing, it is time to act.

How the DSO Calculation Works

The DSO calculation can be done in several ways. The basic DSO formula is:
(Open Accounts Receivable / Total Credit Sales) × Number of Days in Period

There are monthly and yearly methods:

Monthly calculation:
(Accounts receivable at month-end / Average daily sales) × 30 days
Yearly calculation:
(Accounts receivable at year-end / Annual sales) × 365 days

Example:
At the end of June, the total accounts receivable is £80,000 and the sales for that month are £88,000.
DSO June = £80,000 / £88,000 × 30 days = 27.3 days

In July, accounts receivable totalled £60,000 with sales of £40,000.
DSO July = £60,000 / £40,000 × 31 days = 46.5 days

Note: fluctuations in sales and exceptionally large invoices can distort your DSO.

What is a Good DSO?

In general, a DSO under 45 days is considered healthy, but this varies by industry. In some sectors, 30 days is achievable, while others operate with longer average payment terms. Always compare your DSO with peers in your sector when setting targets. Understanding the DSO meaning in finance is crucial for accurate benchmarking.

How to Improve and Reduce DSO

A low DSO benefits every organisation. Here are some practical tips on how to calculate DSO effectively and then lower it:

1. Invoice immediately after delivering goods or services.
2. Ensure invoices are clear and accurate to prevent disputes or delays.
3. Offer easy payment options such as bank transfers, direct debit, or online payments.
4. Send automated reminders as soon as the payment term expires.
5. Maintain regular contact with clients to address any questions or issues quickly.
6. Run credit checks to assess customer reliability in advance.

By automating these steps within your DSO management process, you can maintain a healthy Days Sales Outstanding ratio.

How Payt Can Help You Reduce DSO

With Payt’s accounts receivable software, you can reduce your DSO by 30–50%. Our platform:

• Sends automated payment reminders.
• Makes paying simple for your customers.
• Provides real-time insights through clear dashboards.

This keeps you in control, saves you time, and helps you get paid faster. Download our brochure below to find out more.

Frequently Asked Questions