Days sales outstanding: the DSO formula with an example
Reviewed in October 2026
Days sales outstanding (DSO) is the average number of days a business takes to collect payment after a sale on credit. The formula is accounts receivable divided by credit sales, multiplied by the number of days in the period. A DSO of 45 means customers pay, on average, 45 days after the invoice.
The DSO formula
DSO = (Accounts receivable ÷ Credit sales) × Number of days in the period
- Accounts receivable. The open balance at the end of the period.
- Credit sales. Sales made on credit in the same period. Leave out cash sales.
- Number of days. 30 for a month, 90 for a quarter, 365 for a year.
DSO example with figures
An internet provider in Cebu bills its business customers ₱4,800,000 in the third quarter. At 30 September it has ₱2,400,000 still open.
| Item | Value |
|---|---|
| Accounts receivable at 30 Sep | ₱2,400,000 |
| Credit sales July to September | ₱4,800,000 |
| Days in the quarter | 92 |
| DSO | 2,400,000 ÷ 4,800,000 × 92 = 46 days |
Its terms are net 30. Customers are paying about 16 days late on average.
What is a good DSO
A good DSO sits close to your payment terms. Compare it with your own terms first and with your industry second.
| DSO against your terms | What it means |
|---|---|
| At or below the terms | Customers pay on time |
| Up to 10 days above | Some customers forget or delay |
| 10 to 30 days above | Follow-up is missing or late |
| More than 30 days above | Part of the AR is at risk |
Best possible DSO and average days delinquent
Best possible DSO uses only invoices that are not yet due. It shows the DSO you would have if every customer paid on time.
Best possible DSO = (Current AR ÷ Credit sales) × Days in the period
Average days delinquent (ADD) is DSO minus best possible DSO. It isolates the days lost to late payment. In the Cebu example, if current AR is ₱1,500,000, best possible DSO is about 29 days. ADD is then about 17 days.
DSO, DPO and the cash conversion cycle
| Ratio | Formula | Lower is |
|---|---|---|
| DSO | AR ÷ credit sales × days | Better, cash arrives sooner |
| DPO | AP ÷ cost of goods sold × days | Worse for cash, you pay sooner |
| DIO | Inventory ÷ cost of goods sold × days | Better, stock turns faster |
| Cash conversion cycle | DSO + DIO − DPO | Better, less cash tied up |
How to lower DSO
- Invoice on the day of delivery. A late invoice adds days to DSO before the clock starts.
- Remind three days before the due date. It catches the customers who pay on time but forget.
- Put a payment link in every reminder. Fewer steps mean faster payment.
- Follow up on the due date and three days after it.
- Record promises to pay with their date and remind on that date.
- Review the aging report every week, oldest balances first.
- Send a monthly statement to customers with several open invoices.
Common DSO mistakes
- Including cash sales. It makes DSO look better than it is.
- Comparing a month with a quarter. Use the same number of days each time.
- Reading DSO alone. A seasonal spike in sales moves DSO even when nobody pays late.
- Using the year-end AR for a whole year. Average AR over the months gives a truer figure.
The countback method
The standard formula averages the whole period. The countback method reads the open balance against the most recent sales first. It reacts faster when sales change from month to month.
Start from the open balance. Subtract each month's credit sales, newest first, and count that month's days. When a month is larger than what is left, count only the share that fits.
| Step | Balance left (₱) | Days counted |
|---|---|---|
| Open AR at 30 September | 2,400,000 | |
| Less September sales of 1,700,000 | 700,000 | 30 |
| August sales of 1,600,000: 700,000 ÷ 1,600,000 × 31 | 0 | 13.6 |
| Countback DSO | 43.6 days |
The same provider had a standard DSO of 46 days. Countback gives 43.6 because September sales were the highest of the quarter.
DSO when you bill on a fixed day
Schools, gyms, landlords and internet providers bill everyone on the same day each month. Their DSO jumps right after billing day and falls as payments arrive.
For these businesses the month-end DSO can mislead. Two better measures are the share of the month's billing paid by the due date and the share still open 15 days later.
| Measure | How to read it |
|---|---|
| Paid by the due date | The share of the month's billing paid on time |
| Open after 15 days | The share that needs a reminder or a call |
| Open after 45 days | The share at risk of becoming a bad debt |
Reminders before the due date raise the first number. That moves DSO more than any follow-up after it.
DSO in a spreadsheet
A simple sheet tracks DSO every month. Put the month in column A, credit sales in column B and the closing receivables in column C.
| Cell | Formula | What it gives |
|---|---|---|
| D2 | =C2/B2*30 | Monthly DSO with 30-day months |
| E2 | =AVERAGE(D2:D4) | The average of the last three months |
| F2 | =D2-D1 | The change against the month before |
Read the trend, not one month. Three months going up in a row means customers are slowing down.
How payment terms move DSO
DSO starts from your terms. A business on net 60 will never show the DSO of one on net 15.
| Terms | DSO if everyone pays on time | DSO if customers pay 10 days late |
|---|---|---|
| Net 15 | About 15 days | About 25 days |
| Net 30 | About 30 days | About 40 days |
| Net 60 | About 60 days | About 70 days |
The gap between your terms and your DSO is the part you can control. Reminders before the due date shrink it the most.
DSO for a small business
A small business can calculate DSO once a month in a few minutes. Take the open balance on the last day and the credit sales of the month.
Compare the result with your payment terms, not with large companies. A DSO within ten days of your terms is a sign that collections are working.
When DSO grows, look at the aging report to see which customers moved it. Usually it is a handful of accounts, not the whole book.
More on DSO
- Use credit sales only. Including cash sales makes DSO look lower than it really is.
- DSO and the average collection period measure the same thing. The second is the older name, often calculated over a full year.
- Use the same method every month, either the average formula or countback, so the trend compares like with like.
How a business that bills every month lowers DSO
Most of the days in DSO come from invoices nobody reminded on time. Makatea sends a WhatsApp and email reminder before and after each due date.
When the customer pays, Makatea records it and the balance updates. Makatea saves your starting point and compares on-time payment every month. Start free for 14 days with no card.
Sources
- DSO, DPO, DIO and the cash conversion cycle follow standard financial analysis formulas.
- Figures in the examples are illustrative and use a 92-day quarter.
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Frequently asked questions
What is meant by days sales outstanding?
Days sales outstanding. It is the average number of days customers take to pay after a credit sale.
How do you calculate days of sales outstanding?
Divide accounts receivable by credit sales and multiply by the days in the period.
Is a higher DSO good or bad?
Bad. A higher DSO means cash takes longer to arrive and more money is tied up in receivables.
Is days sales outstanding the same as receivable days?
Yes. AR days and days in receivables are other names for DSO.
Should I use 360 or 365 days?
Either works if you use the same one each time. Most businesses use 365 for a year.
What is the difference between DSO and DPO?
DSO measures how fast customers pay you. DPO measures how fast you pay suppliers.
How often should I calculate DSO?
Every month. A monthly figure shows a trend before it becomes a cash problem.
What is the countback method for DSO?
It subtracts each month's credit sales from the open balance, newest month first, and counts the days used. It reflects recent sales better than the average formula.
Can I calculate DSO in Excel?
Yes. Divide closing receivables by credit sales for the month and multiply by 30. Track it for at least three months to see the trend.
What causes a high DSO?
Long payment terms, invoices sent late, disputes left open and reminders that start after the due date. The aging report shows which one applies.
What does DSO tell you?
How many days, on average, your customers take to pay after a sale. A rising DSO means cash comes in slower even if sales look the same, so it is an early warning before a cash shortfall.
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