Days Sales Outstanding (DSO): Definition, Formula & How to Improve It

Offering credit terms can be the reason you win or lose a sale, especially if you’re after repeat customers, bulk orders, or running a business with returning clients. Credit sales lower the barrier to entry, keep orders flowing during quieter periods, and create recurring revenue.

However, sending an invoice instead of taking immediate payment means you’re effectively extending an interest-free loan to customers. And if those invoices aren’t collected quickly, growth can turn into a cash crunch, putting serious pressure on cash flow and working capital. This is where Days Sales Outstanding (DSO) becomes very important as it measures how quickly your business converts credit sales into actual cash.

What is Days Sales Outstanding (DSO)?

Sometimes called receivables days or collection period, DSO is a business metric that shows the average number of days it takes to convert invoices into cash in the bank. For example, a DSO of 45 days means customers typically pay their invoices 45 days after purchase. So, the lower your DSO, the faster cash flows into your business, thereby reducing the need for external funding.

Business owners generally consider DSO one of the clearest indicators of collection efficiency because it shows whether credit policies are working, whether customers are paying on time, and how much cash is tied up in aged debtors.

How to Calculate Days Sales Outstanding (DSO)

The DSO formula is straightforward

Days Sales Outstanding (DSO) = (Accounts Receivable / Credit Sales) × Number of Days in Period

Where:

• Accounts receivable is the total amount customers owe at the end of the period (from your balance sheet)
• Credit sales is the total value of sales made on invoice during the period (excluding cash and card sales)
• Number of days in period is typically 365 for annual calculations, 90 for quarterly, or 30 for monthly. 

Note: Some finance teams use 360 as the number of days for annual calculations (treating each month as 30 days) for simplicity

Worked Example

Let’s say your business had:

• £120,000 in accounts receivable at the end of Q4 2025
• £450,000 in credit sales over the quarter (90 days)

Your DSO calculation would be:

DSO = (£120,000 ÷ £450,000) × 90 = 24 days

This means it takes an average of 24 days to collect payment after a credit sale. If your payment terms are 30 days, you’re collecting slightly ahead of schedule which is a healthy sign.

Now compare this to a less efficient Q3:

• £180,000 in accounts receivable
• £450,000 in credit sales over 90 days

DSO = (£180,000 ÷ £450,000) × 90 = 36 days

Here, collections are taking 36 days, meaning more cash is locked up in receivables. If this continues, there’s a cash flow issue waiting to happen.

Quick Notes on Data Choices

These are some of the practical decisions that should be considered when calculating DSO:

• Average vs closing receivables. Businesses typically use the average accounts receivable balance over a specified period (i.e. opening balance plus closing balance, divided by two) rather than just the closing figure. This smooths out fluctuations and gives a more representative DSO, especially if sales vary significantly month to month.
• Credit sales only. Avoid using total revenue in calculations. Including cash or card sales will artificially deflate DSO and mask collection issues.
• Period length matters. Monthly or quarterly DSO is more useful for operational decisions. Annual DSO is better for trend analysis and lending reviews.

How Managers and Lenders Use DSO

According to MyDebtRecovery, the UK’s small business community is owed an estimated £26 billion in late payments at any given time, losing 133 million hours a year chasing overdue invoices. Understanding DSO and sector benchmarks helps businesses avoid wasting resources on inefficient collection processes.

For instance, wholesale and distribution typically see 30-45 days. Retail businesses with a mix of cash and credit sales may have DSO below 20 days. According to Novuna’s 2025 research, the industry average for wholesale and retail trade sits at ~47 days.

Comparing DSO to sector averages helps assess whether collections performance is competitive. If DSO is significantly higher than peers, it signals the need to tighten credit terms, improve invoicing processes, or address customer payment behaviour.

DSO as a Liquidity Signal

Rising DSO usually means declining liquidity, even if sales are growing. If this happens, it creates cash flow problems such as difficulty paying suppliers, staff or rent. For this reason, business managers view DSO as an operational health check. Increasing DSO suggests customers are stretching payment terms or credit control is slipping.

Lenders and brokers view DSO as a risk indicator. A rising DSO signals weakened ability to service debt and can affect loan approval decisions. In fact, DSO often sits alongside the Debt Service Coverage Ratio in lender assessments, both measuring capacity to meet financial obligations.

Limitations and Common Pitfalls

DSO is useful, but it’s not perfect. Here are the main limitations to watch for:

1. Seasonality and one-off invoices

Businesses with seasonal peaks (e.g hospitality businesses over summer or retail at Christmas) will see DSO swing sharply. A large invoice raised late in the quarter inflates receivables and pushes DSO higher, even if collections are on track. Monthly DSO calculations help smooth out these distortions.

2. Not a standalone measure

DSO provides an average but doesn’t identify which customers are the problem. A DSO of 40 days could mean everyone pays in 40 days, or half pay in 20 and half in 60. So, DSO should sit alongside:

• Aged debtor reports (breaking receivables into 30/60/90+ day buckets)
• Cash flow forecasts
• Debt Service Coverage Ratio (DSCR)

3. Not all invoices represent true credit exposure

DSO is intended to measure how long a business waits to receive cash from customers when sales are made on invoice or credit terms. A key limitation is that not every invoice reflects a genuine delay in payment. 

In many cases, payment is taken upfront, collected automatically by card or Direct Debit, settled through Buy Now, Pay Later, or received via a third party. If these invoices are included in receivables, DSO can be overstated and give a misleading view of cash flow and liquidity.

How to Improve DSO: Practical Actions

Here are the most effective tactics to get paid faster

• Set sensible payment terms for new customers

Rather than offering standard credit terms from day one, many businesses start new customers on shorter payment terms, lower initial invoice values, or payment upfront until a payment history is established.

• Pro: Limits exposure before trust is earned. 
• Con: May deter customers who expect longer terms from the outset.

• Apply proportionate credit checks for higher-value or B2B sales

Formal credit checks are not always necessary for individual consumers or low-value transactions. However, for larger B2B contracts or repeat high-value invoices, a soft credit check can help assess risk and set appropriate limits.

• Pro: Reduces the risk of large late or non-payments. 
• Con: Adds friction and may slow down deal completion for new clients.

• Invoice immediately with clear payment instructions

Invoices should be issued as soon as goods are delivered or services are completed. Payment due dates, bank details, and accepted payment methods should be clearly visible to avoid back-and-forth.

• Pro: Removes avoidable delays and disputes. 
• Con: Relies on disciplined invoicing processes.

• Use electronic invoicing and automated payment reminders

Email invoicing speeds up delivery and reduces manual errors. Automated reminders before and after the due date help prompt payment without requiring constant follow-up.

• Pro: Improves collections with minimal staff time. 
• Con: Usually requires accounting or invoicing software.

• Encourage faster payment where margins allow

Offering a small early-payment discount, such as 1-2% for payment within 10 days, can materially reduce receivables days. This works best where cash certainty is more valuable than maximising margin on each invoice.

• Pro: Accelerates cash inflow. 
• Con: Reduces margin per sale.

• Apply selective invoice finance or factoring to convert receivables to cash. 

If you have large invoices from creditworthy customers, invoice finance lets you unlock up to 90% of the invoice value immediately. This bypasses DSO entirely for those transactions.

• Pro: Instant liquidity without chasing payment. 
• Con: Fees reduce net proceeds.

Quick Monthly Checklist

To keep DSO under control, these should be done monthly:

• Recalculate DSO monthly and review ageing buckets (30/60/90+ days overdue)
• Compare current DSO to contractual payment terms and to sector benchmarks
• Flag any invoices that exceed your average DSO for immediate collections action
• Identify customers with repeated late payment and consider tightening their terms or requiring deposits

Conclusion

Improving your DSO, whether through tighter credit control, faster invoicing, or selective use of finance tools, directly reduces the amount of working capital tied up in receivables, easing pressure on cash flow and reducing your reliance on loans.

At 365 Finance, we understand that strong sales don’t always mean strong cash flow. If slow-paying customers are straining your liquidity, our invoice finance solutions can release cash from outstanding invoices in as little as 24 hours. Speak to an adviser to explore how we can support your working capital needs.