How to calculate days sales outstanding (DSO)
Days sales outstanding (DSO) is a cash-flow metric that reveals how efficiently you collect on invoices. A high DSO means cash is tied up in unpaid invoices, straining working capital.
For recurring-revenue businesses, DSO connects bookings and billings to actual cash. Even strong revenue does not help if collections are slow, which is exactly what DSO exposes.
- (AR / credit sales) x days The formula
- Lower is better Faster collection
- Cash flow What it protects
Short answer
Days sales outstanding measures how long it takes to collect payment after a sale. Divide accounts receivable by total credit sales for a period, then multiply by the number of days in that period. If receivables are 300,000 dollars, quarterly credit sales are 1,200,000 dollars, and the period is 90 days, DSO is (300,000 / 1,200,000) times 90, or 22.5 days.
Step by step
Take accounts receivable
Use the accounts receivable balance at the end of the period, the amount invoiced but not yet collected.
Take total credit sales
Use total sales made on credit (invoiced, not prepaid) for the period.
Divide and multiply by days
DSO equals accounts receivable divided by total credit sales, times the number of days in the period.
Track the trend
Watch DSO over time. A rising DSO means collections are slowing and cash is increasingly tied up, a warning worth acting on.
Worked example
At quarter end, accounts receivable is 450,000 dollars. Credit sales for the 90-day quarter were 1,800,000 dollars.
DSO = (450,000 / 1,800,000) times 90 = 0.25 times 90 = 22.5 days. That means, on average, it takes about 22 days to collect after a sale. If DSO rose to 40 days next quarter, collections would be slowing and working capital tightening, worth investigating.
How Ardovo handles it
Ardovo connects bookings and billings to collections, so DSO ties back to the deals behind it. Rook flags overdue invoices and rising DSO, so slow collections surface as an actionable list rather than a quarter-end surprise.
Frequently asked questions
What is the DSO formula?
Accounts receivable divided by total credit sales for a period, times the number of days in that period. It measures the average number of days it takes to collect payment after a sale.
Why does DSO matter?
Because it reveals how efficiently you collect cash. A high or rising DSO means cash is tied up in unpaid invoices, straining working capital. Even strong revenue does not help cash flow if collections are slow.
What is a good DSO?
Lower is better, and it varies by billing terms. If you bill net 30, a DSO near or below 30 means you collect on time. A DSO well above your payment terms signals collection problems worth addressing.