What is Days Sales Outstanding?

Depending on your position in your company, you might see a lot of sales revenue coming in. But when will the company actually be able to use it? Today’s finance phrase can help you find out.

Days Sales Outstanding (DSO) tells you how long, on average, it takes for customers to pay after being invoiced. When invoicing customers, we always recommend using an invoice generator.

The team at Income|Outcome highlights why this matters: businesses need cash to operate daily. If customer payments are slow, companies have to raise cash elsewhere—such as borrowing from a bank (which is expensive), delaying their own payments (which is risky), or putting in more of their own money (which is rarely ideal).

That’s why the finance department is always trying to get the sales team to reduce the payment terms they give to customers.

How to Calculate Days Sales Outstanding (DSO)

To find your DSO at year-end, use this formula:

(Accounts Receivable at Year-End / Total Annual Sales) × 365

For example, if you have $60,000 in receivables on $360,000 in sales, one-sixth of your annual sales is still unpaid. Multiply 365 by 1/6, and you get 61 days—meaning it’s taking your customers about 61 days to pay.

Real-World Examples

• Supermarkets and department stores have very low DSO because customers pay with cash or credit cards, which are reimbursed quickly. Target’s DSO is around 6 days.

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• Luxury goods and financed purchases tend to have higher DSO. Harley-Davidson, which offers customer financing, had a DSO of 127 days in 2014.

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Why DSO Matters

Different industries have different DSO norms, but most businesses want to shrink their DSO—unless they make money on financing, like Harley-Davidson.

If your DSO is 60 days, reducing it to 45 days would cut receivables by 25%, turning unpaid invoices into usable cash—which is never a bad thing.

Want to improve business acumen in your organization? Contact us to learn more about Income|Outcome simulations.

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