Days sales outstanding (DSO)
Days sales outstanding, or DSO, is the average number of days it takes you to get paid after you invoice. It turns "customers are paying slowly" into a number you can track month to month.
The formula
DSO = (accounts receivable / total credit sales) x number of days
- Accounts receivable: what customers owe you at the end of the period.
- Total credit sales: what you invoiced during the period (leave out cash sales paid on the spot).
- Number of days: the length of the period, usually 30, 90 or 365.
A worked example
Say that in March you invoiced $60,000, and at the end of March customers owed you $45,000.
DSO = ($45,000 / $60,000) x 31 = 23 days
On average, it takes you about 23 days to turn an invoice into cash.
Finding the numbers in QuickBooks Online
- Accounts receivable: run the A/R Aging Summary report as of the last day of the period, and use the Total at the bottom. (Or read Accounts Receivable on the Balance Sheet.)
- Credit sales: run Sales by Customer Summary (or Profit and Loss, for income) for the same period.
Calculate it the same way each month, and watch the trend rather than any single number.
What's a good DSO?
It depends on your terms. A useful rule of thumb: your DSO should be close to your payment terms. If you invoice on Net 30 and your DSO is 32, customers are paying roughly on time. If it's 50, a lot of invoices are going well past due.
| Your terms | Healthy DSO | Worth a look |
|---|---|---|
| Due on receipt / Net 7 | Under 15 days | Over 20 days |
| Net 15 | Under 25 days | Over 35 days |
| Net 30 | Under 40 days | Over 50 days |
A rising DSO is an early warning: it usually shows up months before a cash crunch does.
Five ways to lower it
- Invoice the day the work is done. Every day of delay adds a day to DSO.
- Shorten your terms where customers will accept it. See Net 30 payment terms.
- Make paying easy. Turn on online payments in QuickBooks so the invoice has a pay button.
- Follow up the day after the due date, not at month end. Our reminder templates and payment scripts cover each stage.
- Act on the aging report. Chase large balances as soon as they enter the 1 to 30 days column; see the A/R aging report, explained.
Catch late invoices on day one
The quickest way to bring DSO down is to shorten the time between an invoice going overdue and someone following up. CashWatchdog checks your QuickBooks Online company every morning and emails you the invoices that just went past due, so follow-ups start on day one instead of at the next month-end review.