Days Sales Outstanding (DSO)
Days sales outstanding measures the average number of days between invoicing and cash receipt. It is the most direct indicator of how quickly revenue becomes cash, and the part of working capital that responds fastest.
Calculation
The simple formula: DSO = (trade receivables / revenue for the period) × number of days. Quick to compute and imprecise when revenue fluctuates.
More robust is the counting-back method: the receivables balance is worked backwards against the revenue of preceding months until it is used up. The number of days traversed is the DSO. This method handles seasonality correctly and is the one that holds up in due diligence.
What the number says
A DSO of 45 days against agreed terms of 30 means an average overrun of 15 days. At twelve million euros of annual revenue that is roughly 500,000 euros sitting permanently with customers rather than in your account.
The distribution matters more than the average. A DSO of 45 can mean every customer takes 45 days – or that 90 percent pay on time and one large account takes 120. The second is a concentration risk, the first a process problem.
The levers
- Invoice faster. The most common and most overlooked point: invoices issued in a batch at month end add up to 15 days to DSO – without a single customer doing anything wrong.
- Review payment terms. Not every term was negotiated; many are simply historical.
- Dunning with stages and dates. Automated, not by instinct.
- Deposits and progress invoices on long projects.
- Credit checks before the order rather than collection afterwards.
Distinction
DSO is an average and says nothing about default risk. That needs the ageing of receivables. Both belong in monthly reporting – one steers cash, the other risk.