# Days Sales Outstanding (DSO)

## Quick Definition
The average number of days it takes to collect payment after a sale is made.

## What is Days Sales Outstanding?
DSO measures how long it takes to turn a sale into cash in your bank account. Lower is better. A DSO of 30 means you collect payment about a month after invoicing.

## Why DSO Matters for Founders
Cash timing kills companies. A SaaS business with 60-day DSO and monthly payroll obligations can be profitable on paper but scrambling for cash every cycle. Understanding DSO helps you anticipate cash crunches and negotiate better terms.

For ecommerce founders selling wholesale or B2B, DSO directly impacts working capital needs. Every 10-day increase in DSO means more cash trapped waiting for customer payments.

## How to Calculate DSO Step by Step
**Step 1: Pull your accounts receivable balance.** This is the total amount customers owe you right now. Find it on your balance sheet or in your accounting software.

- **Accounts Receivable: $185,000**

**Step 2: Calculate your average daily revenue.** Use the same period (monthly or quarterly) for consistency.

- Quarterly revenue: $540,000
- Days in quarter: 90
- **Average Daily Revenue = $540,000 ÷ 90 = $6,000/day**

**Step 3: Divide AR by daily revenue.**

- **DSO = $185,000 ÷ $6,000 = 30.8 days**

Customers pay about 31 days after invoicing. If your terms are net-30, this is right on track.

**Step 4: Compare to your payment terms.**
- DSO < payment terms → Customers pay early. You may have leverage for faster terms
- DSO = payment terms → Collections are healthy
- DSO > payment terms → Customers pay late. Address collection process

**Step 5: Segment by customer.** Your blended 31-day DSO might hide that enterprise customers pay in 60 days while SMB pays in 5 (credit card). Knowing this helps you staff collections and forecast cash.

**Common mistakes founders make:**
- Not separating SaaS subscriptions (DSO near zero with card payments) from enterprise invoices (DSO can be 45-90 days)
- Using total revenue instead of credit sales (cash sales should be excluded)
- Measuring DSO monthly when you have seasonal patterns (use rolling quarterly)
- Ignoring the cash impact — every 10-day increase in DSO at $6K/day = $60K more cash tied up

## Managing DSO
Tactics to reduce DSO include offering early payment discounts, automating invoice reminders, requiring deposits, and implementing stricter credit policies for slow payers.

## Formula
DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days  
Or: DSO = 365 ÷ Receivables Turnover

## Example
Your SaaS company has:
- Accounts Receivable: $250,000
- Monthly Credit Sales: $200,000

DSO = ($250,000 ÷ $200,000) × 30 = 37.5 days

On average, customers pay about 38 days after invoicing. If your terms are net-30, you have a collection problem to address.

## Related Terms
[**Cash Conversion Cycle (CCC)**  
The number of days between paying for inventory and collecting cash from customers.  
Learn more](/content/terms/cash-conversion-cycle/index.html)

[**Accounts Receivable Turnover**  
How efficiently a company collects payments from customers, measured by how many times receivables are collected annually.  
Learn more](/content/terms/accounts-receivable-turnover/index.html)

[**Working Capital**  
The difference between current assets and current liabilities, measuring ability to fund daily operations and meet short-term obligations.  
Learn more](/content/terms/working-capital/index.html)

## See These Metrics in Action
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