Definition
The FDIC's Money Smart for Small Business cash flow module defines days sales outstanding as the average number of days it takes a business to collect payment after a sale. It is one part of the cash conversion cycle, together with days inventory outstanding and days payables outstanding.
How to calculate it
A common method:
DSO = (accounts receivable at the end of the period / credit sales in the period) x days in the period
Some businesses use average accounts receivable over the period instead of the ending balance. Choose one method and use it every time so the trend is meaningful.
Illustrative example
The figures are made up for illustration only. A shop has $60,000 in open invoices at the end of a 30-day month, and invoiced $90,000 on credit during that month. DSO is 60,000 / 90,000 x 30 = 20 days.
How shops use DSO
- Compare with your terms. If most customers are on net 30 and DSO is well above 30, customers are paying late on average.
- Watch the trend. A rising DSO warns of collection problems before cash runs short.
- Find the cause. Use accounts receivable aging to see which customers drive the number.
Ways to lower DSO
- Send invoices the same day the work is done.
- Include everything the fleet needs to approve the invoice, such as purchase order and unit numbers.
- Offer easy payment methods, such as pay links.
- Follow a set reminder schedule and send statements.
- Review credit terms for customers who are often late.
Related: net terms, statement billing, how to invoice fleet customers.
MetaFleet supports invoicing with per-customer terms printed on every invoice, payments with pay links, and reports. Get a walkthrough.