A financial metric that measures the average number of days it takes a company to collect payment after a sale has been made. It is a key indicator of a company’s cash flow efficiency and credit management practices.
A lower DSO indicates that a business is collecting payments quickly, strengthening cash flow and reducing the risk of bad debt. A higher DSO, on the other hand, may suggest inefficiencies in accounts receivable processes or lenient credit terms, potentially straining working capital.
DSO Formula
Loading formula...For example, if a company has $300,000 in receivables and $1 million in annual credit sales, the DSO over a 30-day month would be:
(300,000 ÷ 1,000,000) × 30 = 9 days
Finance teams widely use DSO to benchmark performance over time, compare with industry standards, and inform decisions on credit policies and collection efforts. Monitoring DSO trends can help identify emerging cash flow issues before they impact operations.
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