Why it matters
A rising DSO means cash is sitting with customers instead of the business. It can put pressure on payroll and vendor payments even when sales are strong, and it is one of the first signs of a collection problem.
Example
A client has $100,000 of accounts receivable and $1,200,000 of annual revenue. Using a 365-day year, DSO is about 30 days, meaning the average customer pays in about a month.
Related terms
Questions about Days sales outstanding
How is days sales outstanding calculated?
Divide the average accounts receivable by revenue for the period, then multiply by the number of days in the period. A 365-day year is common for an annual calculation.
Does a low DSO always mean good collections?
Usually, but a business that requires prepayment or sells mostly for cash will have a low DSO without a collection effort. Compare the ratio with the business's payment terms.