How to Calculate DSO: Formula, Example, and Best Practices

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:

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

Step 2: Multiply by Number of Days

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

Best Practices to Reduce DSO

Reducing DSO requires a combination of process improvements, technology adoption, and proactive customer management. Here are proven strategies to accelerate collections:

1. Send Accurate Invoices Immediately

The collection clock starts when you send the invoice. Delays in invoicing directly extend DSO. Ensure invoices are accurate, complete, and sent within 24 hours of delivery or service completion. Errors in invoices give customers a reason to delay payment while disputes are resolved.

2. Offer Multiple Payment Methods

Make it easy for customers to pay by accepting credit cards, ACH transfers, wire transfers, and digital wallets. The fewer friction points in the payment process, the faster customers will pay. Consider offering early payment discounts (e.g., 2% discount if paid within 10 days) to incentivize prompt payment.

3. Automate Payment Reminders

Manual follow-up is inconsistent and time-consuming. Automated reminder systems ensure every customer receives timely notifications before and after payment due dates. AI-powered systems can personalize these reminders based on customer payment history and preferences, improving response rates without damaging relationships.

4. Implement Clear Credit Policies

Establish and communicate clear payment terms upfront. Conduct credit checks on new customers and set appropriate credit limits. For customers with poor payment history, consider requiring deposits or shorter payment terms. Document these policies and ensure your sales team understands them to avoid setting unrealistic expectations.

5. Prioritize High-Value and Overdue Accounts

Not all receivables are equal. Focus collection efforts on high-value invoices and accounts that are significantly overdue. AI-powered AR systems can automatically prioritize accounts based on amount, days overdue, and likelihood of payment, ensuring your team focuses on the collections that will have the biggest impact on DSO.

6. Resolve Disputes Quickly

Payment disputes can significantly extend DSO. Establish a clear process for handling disputes and empower your AR team to resolve issues quickly. Track common dispute reasons and work with other departments (sales, operations, customer service) to address root causes and prevent future disputes.

7. Use AR Automation and AI

Modern AR automation platforms use AI to predict payment behavior, personalize collection strategies, and automate routine tasks. These systems can reduce DSO by 10-20% by ensuring consistent follow-up, eliminating manual delays, and optimizing collection timing. They also free your team to focus on high-value activities like relationship management and dispute resolution.

Calculating the ROI of Reduced DSO

Reducing DSO has a direct impact on cash flow and working capital. Here's how to calculate the financial benefit:

Step 1: Calculate Cash Freed Up

If you reduce DSO by 10 days and your average daily credit sales are $100,000, you free up $1,000,000 in cash:

Step 2: Calculate Interest Savings

If your cost of capital is 8% annually, freeing up $1,000,000 saves you $80,000 per year in interest or opportunity cost:

Step 3: Add Operational Savings

AR automation also reduces the time your team spends on manual collections. If automation saves 20 hours per week at a fully-loaded cost of $50/hour, that's an additional $52,000 per year:

Total Annual Benefit: $132,000

This example shows how even modest DSO improvements can generate significant financial returns, making AR automation one of the highest-ROI investments a finance team can make.

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.

Want to see how AI can cut your DSO in half? Book a demo with our team.