Days Sales Outstanding (DSO): Basics, Formula, and How to Improve It
Managing cash flow is crucial for any business, and one key factor in this is how quickly you collect payments after making a sale. Delays in receivables can strain operations, hinder growth, and create cash shortages, making it vital to track how efficiently you turn invoices into cash. This is where DSO steps in. If your DSO is too high, your company might struggle with cash flow. On the other hand, a lower DSO means faster collections and more financial stability.
This guide breaks down what DSO is, how to calculate it, and how to improve it. Plus, we’ll show how iNymbus helps businesses automate deduction management, speeding up payments and increasing efficiency, how to reduce DSO, and what common mistakes should be avoided to maintain DSO.
Days Sales Outstanding Definition
Days Sales Outstanding (DSO) defines — the financial metric that measures the average number of days it takes for a company to collect payment after making a sale.
In easy language, we can say that the days sales outstanding means, how long, on average, it takes to collect payment from customers after a sale.
How to Calculate DSO
Here's how you can calculate days sales outstanding. The days sales outstanding formula helps you figure out how long it takes to get paid after making a sale.
Formula:
Where:
- Accounts Receivable Money still owed by customers
- Total Sales Revenue from sales during a specific period
- Number of Days The period under review (e.g., 30 days, 90 days)
Example: A company makes $100,000 in sales in a month and has $25,000 in outstanding invoices.
DSO=(25,000/100,000)×30=7.5
This means, on average, the company gets paid every 7.5 days.
Using this formula, you can calculate DSO in Excel easily. First of all, enter the data column-wise in an Excel sheet then apply the formula. For example, you have entered data in three columns as A1, B1, and C1 then labeled the A4 as DSO and applied the formula: =(A2/B2)*C2.
Why Businesses Need DSO
As we discussed what is DSO? Now, the question arises, why do businesses need DSO? let’s discuss it, DSO gives average days to receive pending payments. From this report, the business gets to know how the cash flow moves into the business and what its financial condition is.
More days indicate a risk of High DSO and the need to change strategy to maintain DSO, whereas low DSO says that cash flow runs smoothly. Also here are ideal DSO ranges that are considered good for most industries.
Highlighting the Benefits of Low DSO vs. Risk of Higher DSO
DSO shows how quickly a business collects payments from customers.
- High DSO = Customers take longer to pay, which can create cash flow problems.
- Low DSO = Faster collections, ensuring smoother operations and financial health.
Let’s see the difference between the benefits of low DSO and the risk of higher DSO.
Top 5 Strategies to Improve DSO
Improving DSO is a mandatory task as it reflects on receivable balances and growing the cash flow. This will need strategic work, here are the top 5 strategies listed to improve DSO. Also, try to explain why use this strategy, how to implement it, and what is the benefit of this strategy.
To measure the success of these strategies, it’s essential to track the right metrics. Check out our guide on Deduction Management KPIs: Measuring What Matters.
How iNymbus Helps to Improve DSO
Improving Days Sales Outstanding (DSO) is crucial for maintaining a healthy cash flow, and iNymbus plays a key role in achieving this by automating deduction management. By streamlining the process, accelerating payments, and reducing manual work, iNymbus ensures businesses can collect payments faster and optimize their financial performance. Here’s how:
1. Faster Dispute Resolution
- iNymbus automates the entire deduction dispute process, reducing manual efforts and eliminating delays.
- Instead of spending weeks or months resolving claims, disputes are filed within hours, leading to quicker recoveries.
- Many companies struggle with large deduction backlogs that tie up cash flow. iNymbus clears years of backlogged claims in weeks, improving overall receivables turnover.
- Example: A video game distributor cleared a 2-year Walmart deduction backlog within weeks, accelerating cash recovery.
- iNymbus ensures high recoverability of deductions that are wrongly taken. By ensuring every invalid claim is disputed promptly, businesses recover more revenue that would otherwise be written off.
- The platform provides insights into outstanding deductions, pending disputes, and recovered amounts, allowing businesses to track and optimize their receivables performance.
- Manual processing is slow and prone to errors. Automation ensures that all disputes are filed with the correct documentation, reducing rejections and increasing successful recoveries.
- Businesses handling thousands of deductions per month can process them seamlessly without hiring additional resources, leading to cost savings and improved efficiency.
By leveraging iNymbus, businesses can minimize delays, improve cash flow, and achieve a healthier DSO, ensuring long-term financial stability.
Strategic Steps to Reduce DSO
Minimizing DSO enables companies to enhance their cash flow and lessen financial risks. Here are several useful approaches:
- Define Explicit Credit Guidelines
Only offer credit to trustworthy customers and make sure your payment terms—like Net-30—are clear, fair, and easy to enforce. - Bill Promptly and Precisely
Send invoices as soon as goods or services are delivered, and double-check for any errors to avoid delays. - Automate Payment Notifications
Use automated emails or texts to gently remind customers about upcoming due dates. - Implement Early Payment Incentives
Encourage faster payments by giving small discounts—like 2% off if paid within 10 days—to make it worthwhile for customers. - Facilitate Payment Options
Support multiple payment methods, including credit cards, online transfers, and digital wallets, so customers can pay conveniently. - Address Late Payments
Have a dedicated team to follow up on overdue accounts and ensure payments don’t slip through the cracks. - Enhance Customer Engagement
Keep open communication with customers to resolve any payment concerns early and maintain a smooth cash flow.
Common Mistakes to Avoid
❌ No Clear Credit Policies → ✅ Regularly review and enforce credit terms.
❌ Manual Invoicing → ✅ Automate invoicing and payment reminders.
❌ Delayed Follow-Ups → ✅ Establish a structured collection process.
❌ Not Tracking DSO Metrics → ✅ Use reporting tools to monitor DSO.
❌ Ignoring Disputes → ✅ Automate deduction management.
❌ No Incentives for Early Payments → ✅ Offer discounts for prompt payments.
❌ Not Using Technology → ✅ Invest in automation for efficiency.
Pro tip: Manual deduction handling isn’t always better—automation improves accuracy and efficiency. Learn more in this guide: Busting the Top Myths About Deduction Management for Suppliers
Wrap-Up
To wrap up, keeping DSO maintained is essential for healthy cash flow and financial stability. By implementing strategies like automation invoicing, clear credit policies, and proactive collections, businesses can significantly reduce DSO and speed up overall efficiency.
Technology like iNymbus simplifies deduction management, making the entire process more efficient. Avoiding common mistakes and staying proactive with payment collections will help businesses grow, stay competitive, and maintain strong financial health.
At the end of the day, improving DSO isn’t just about numbers; it’s about giving your business the cash flow and confidence to grow. With the right strategies and tools, you can focus on what truly matters—building stronger customer relationships and scaling your success.
FAQs
1. What does Days Sales Outstanding (DSO) mean?
DSO is a financial metric that measures the average number of days a company takes to collect payment after making a sale. It helps assess the efficiency of accounts receivable and cash flow management.
2. Why DSO is important?
A lower DSO means quicker cash flow, allowing businesses to reinvest and operate smoothly. A high DSO can lead to cash flow issues, increasing financial uncertainty.
3. What is considered a good DSO?
A good DSO varies by industry, but generally, a DSO below 45 days is considered healthy. A lower DSO indicates that customers are paying on time, improving cash flow.
4. How often should businesses review their DSO?
Companies should review their DSO monthly or quarterly to spot trends and take corrective action if needed.
5. What causes a high DSO?
A high DSO can be caused by:
- Poor credit policies
- Late invoice issuance
- Inefficient collection processes
- Disputes or deductions delaying payments
- Customers with slow payment habits
