Learn how to calculate days sales outstanding to boost your cash flow

Cash flow is the backbone of any business, but it can also be a major bottleneck. In fact, even the most profitable businesses can struggle to fund their day-to-day operations if their order-to-cash cycle is faltering. One way to assess the efficiency of a business and the predictability of its cash flow is by monitoring a financial ratio called days sales outstanding (DSO). A simple DSO calculation measures the average number of days it takes to collect payment from customers, providing data-driven visibility into – and opportunities to improve the effectiveness of – a company’s accounts receivable management.

Why should I measure days sales outstanding?

Cash flow is the backbone of any business, but it can also be a major bottleneck. In fact, even the most profitable businesses can struggle to fund their day-to-day operations if their order-to-cash cycle is faltering. One way to assess the efficiency of a business and the predictability of its cash flow is by monitoring a financial ratio called days sales outstanding (DSO). A simple DSO calculation measures the average number of days it takes to collect payment from customers, providing data-driven visibility into – and opportunities to improve the effectiveness of – a company’s accounts receivable management.

How do I calculate days sales outstanding (DSO)?

Also known as days sales in receivables, the DSO formula requires a few key pieces of information:

1. A time range (e.g., 30 days)
2. Your average accounts receivable for that time
3. Your total credit sales for that time (these are any sales that are not settled immediately; they are paid after the sale)

What is the DSO formula?

Average accounts receivable divided by total credit sales and then multiplied by time range = Days sales outstanding

Your DSO calculation may fluctuate throughout the year, so monitoring it regularly to spot patterns or trends will give you higher quality information as you aim to reduce the amount of time that lapses between the date an invoice is issued and the date when the cash appears on your balance sheet. 

What does a high DSO mean?

If you have a high DSO, it signals inefficiency in the cash conversion cycle, which means you need to look at adjusting your accounts receivable (AR) systems. In fact, it might be a good time to consider automated AR processes. Automation can accelerate efficiencies, accuracy and cash application.

How can we improve our DSO?

A remittance matching solution is one way you can improve your DSO. You can boost your straight-through processing rate, slash exceptions, and enjoy same-day ACH processing.

What's the difference between DSO and accounts receivable turnover?

While DSO measures how long it takes your business to apply cash payments after sales, accounts receivable turnover measures how efficient your company is in collecting those payments. The receivables turnover is calculated by simply dividing net credit sales (total credit sales minus any returns or reductions) by average accounts receivable. A high receivables turnover ratio and a low DSO means your cash collection process is efficient. A low receivables turnover ratio and a high DSO means your cash flow could be improved.

Streamline your receivables process with Deluxe

Increasing efficiencies in your cash conversion cycle can transform the health and growth of your business. With accounts receivable management and automation by Deluxe, you can process payments at the speed of light thanks to a single, cloud-based solution.