Days Sales Outstanding (DSO) is a key accounts receivable metric that indicates the average time it takes for a company to collect payment after a sale. A low DSO means customers pay quickly, while a high DSO indicates delays and cash tied up in receivables.
In this guide you will learn the DSO formula, see a worked example, compare benchmarks, discover best practices to reduce DSO, and learn how to calculate the ROI of reduced DSO
The DSO formula
The standard formula for DSO is:
DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days
Where:
Accounts Receivable is the value of outstanding invoices at the end of the period
Total Credit Sales is the total sales made on credit during the period
Number of Days is the length of the period, such as 30, 90, or 365 days
Example: How to calculate DSO
Imagine your company reports the following for the last quarter:
Accounts Receivable: 500,000
Total Credit Sales: 3,000,000
Number of Days: 90
Step 1: Divide Accounts Receivable by Credit Sales
500,000 ÷ 3,000,000 = 0.1666
Step 2: Multiply by Number of Days
0.1666 × 90 = 15
Your company’s DSO is 15 days. On average it takes 15 days to collect payment from customers after making a sale.
What Is a good DSO?
The answer depends on your industry and customer base.
SaaS companies often target a DSO between 30 and 45 days
B2B marketplaces may see DSO between 40 and 60 days
Manufacturing and distribution businesses often operate with 50 to 70 days
What matters most is how your DSO compares with peers in your sector and whether it is improving over time. A rising DSO can be a red flag that customers are paying late, that credit policies are too loose, or that collections processes are not effective.
Common causes of high DSO
High DSO can be caused by:
Invoices that are sent late or contain errors
Customers who systematically try to find reasons to pay late
Over-crowded email inbox where it’s hard to prioritise tasks that drive DSO
Lack of structured follow-up on overdue accounts
Manual collection processes that are slow and inconsistent
Dunning workflows that are not personalised to the customer
Payment disputes that take too long to resolve
How to calculate ROI from reducing DSO
Find daily credit sales
Daily Credit Sales = Annual Credit Sales ÷ 365
Calculate the cash released
Cash Released = Daily Credit Sales × Reduction in DSO (days)
Apply the cost of capital
Annual Value = Cash Released × Cost of Capital (%)
Subtract cost of improvements (e.g., AR automation software)
ROI = (Annual Value – Cost of Improvements) ÷ Cost of Improvements
Example: $100M revenue company
Annual Credit Sales: $100,000,000
Current DSO Reduction: 30 days
Cost of Capital: 10%
Step 1: Daily Credit Sales
$100,000,000 ÷ 365 = $273,973 per day
Step 2: Cash Released
$273,973 × 30 = $8,219,178
Step 3: Annual Value of Cash Released
$8,219,178 × 10% = $821,918 saved per year
Step 4: ROI Example with Software Investment
If AR automation costs $50,000 per year:
ROI = ($821,918 – $50,000) ÷ $50,000 = 1,543% ROI
Takeaway: For a $100M business, reducing DSO by just 30 days can unlock more than $8 million in working capital and generate close to $1M in annual financial benefit
Best practices to reduce DSO
Invoice promptly and accurately
Send invoices as soon as the sale is recorded. Double check for errors to avoid delays caused by disputes.
Set clear credit terms
Ensure customers know your payment terms before doing business. Shorter terms or incentives for early payment can accelerate cash inflows.
Segment customers by risk
Identify late payers and monitor them closely. Apply stricter credit policies where necessary.
Automate reminders and follow ups
Use AR automation tools to schedule polite payment reminders before and after due dates. Consistency improves collections and reduces manual work.
Resolve disputes quickly
Establish a process for fast resolution of billing issues. The longer a dispute lingers, the higher the chance of delayed payment.
Leverage AI and automation
Modern AR software can predict late payments, prioritize follow ups, and automatically draft tailored emails. Many companies see DSO drop by 10 to 20 percent within months of adopting automation.
Final thoughts
The formula for DSO is simple, but the insights it provides are powerful. By tracking DSO consistently, comparing it with benchmarks, and applying best practices, finance teams can improve collections and unlock cash.
If your DSO is climbing, it may be time to modernize your accounts receivable process. AI powered AR automation can help you collect faster, reduce disputes, and free your team from manual chasing.