What is DSO?
DSO (Days Sales Outstanding) measures the average number of days a company needs to collect payment for its credit sales. It is the key indicator of accounts receivable performance: the higher it is, the more cash is tied up with your customers and the higher your working capital requirement.
Tracked over time, DSO reveals how effective your collections are, the quality of your invoicing and your customers’ payment behaviour.
How to calculate DSO
1. The accounting method
This is the most widely used method. It compares trade receivables with revenue over a period:
DSO = (Trade receivables incl. VAT ÷ Revenue incl. VAT for the period) × Number of days in the period
Receivables of €22M incl. VAT, quarterly revenue of €30M incl. VAT: DSO = (22 ÷ 30) × 90 = 66 days.
Simple and fast, it does however smooth out variations in activity: with seasonality or strong growth, it can over- or underestimate the actual delay.
2. The count-back method
More accurate, it “exhausts” the receivables balance by successively deducting the revenue of the most recent months until the balance is fully covered:
- deduct the last month’s revenue from receivables: if a balance remains, count 30 days;
- continue with the previous month, and so on;
- for the last month, count only the fraction of the month matching the remaining balance.
Receivables of €22M; sales of €11M last month, €10M the month before, €9.5M the month before that. 22 − 11 = 11 (30 days); 11 − 10 = 1 (30 days); 1 ÷ 9.5 × 30 ≈ 3 days. DSO ≈ 63 days.
This method better reflects reality when activity varies from month to month. It is the one we recommend for monthly steering.
How to interpret your DSO
A DSO is neither good nor bad in absolute terms: compare it first with the payment terms you grant. The gap between the two is your average payment delay, a direct measure of collection effectiveness.
- Compare it with your payment terms: in France, between businesses, agreed terms cannot in principle exceed 60 days from the invoice date, or 45 days end of month (specific rules apply in some sectors).
- Track the trend over a rolling 12 months rather than a single value.
- Stay consistent: receivables and revenue both including VAT, same method every month.
- Break it down by segment (company, region, salesperson, customer) to find where to act.
How to reduce your DSO
Every day of DSO saved releases the equivalent of one day of sales in cash. The most effective levers:
- Assess risk at account opening and set appropriate credit limits;
- Invoice quickly and accurately, as a disputed invoice is often the start of a delay;
- Send structured reminders, before and on the due date, with scenarios suited to each customer profile;
- Resolve disputes collaboratively with sales and sales administration;
- Steer with KPIs: aged balance, DSO by segment, promises to pay.
This is exactly what Credit Management software such as Hoopiz automates: among our mid-sized and group customers, we see on average −10 days of DSO after 12 months of use (order of magnitude, depending on the starting point).
Frequently asked questions about DSO
What is the difference between DSO and payment terms?
Payment terms are what you contractually grant your customers (for example 45 days). DSO measures the time actually taken to collect your sales. The gap between the two is the average payment delay.
What is a good DSO?
A good DSO is close to your contractual payment terms: a low average delay means your customers pay on time. It depends heavily on the sector and commercial terms; the trend over time matters more than a single value.
Should DSO be calculated excluding or including VAT?
Trade receivables include VAT, so they must be compared with revenue including VAT. Mixing receivables including VAT with revenue excluding VAT overstates DSO by about 20% with a 20% VAT rate.
Accounting or count-back method: which should I choose?
The accounting method is quick and fine for an estimate. The count-back method is more accurate when activity varies from month to month (seasonality, growth): it is best suited to monthly steering.
How often should DSO be calculated?
Ideally every month, on a fixed date, tracking the trend over a rolling 12 months and by segment. Credit Management software calculates it automatically from your accounting data.
What is the link between DSO and cash?
Each day of DSO represents roughly one day of sales including VAT tied up with your customers. Reducing DSO by 10 days therefore releases the equivalent of 10 days of revenue in cash, with no additional financing.