Day Sales Outstanding, or DSO, measures the average number of days it takes a company to collect payment after a sale is made. This cash flow metric is calculated by dividing accounts receivable by average daily sales. Lower DSO indicates faster payment collection, improving working capital and financial health. High DSO may signal collection problems, customer dissatisfaction, or overly generous payment terms. Monitoring DSO helps businesses optimize invoicing processes, payment terms, and collection efforts to maintain healthy cash flow.
How do I improve my company's Day Sales Outstanding (DSO) ratio?
To improve your Day Sales Outstanding ratio, implement a clear credit policy with standardized terms and automate your invoicing process to reduce delays and errors. Offer early payment incentives such as small discounts for customers who pay before the due date, while also following up consistently on late payments with a structured communication plan. Consider requiring deposits or advance payments for new customers or large orders to reduce collection risk from the start. Review your DSO metrics regularly by customer segment and product line to identify specific areas where targeted improvements can have the biggest impact on your overall cash flow.
How does Day Sales Outstanding (DSO) impact cash flow and business growth?
DSO directly impacts cash flow by determining how quickly your sales convert to usable capital, with higher DSO tying up money that could fund operations or growth initiatives. Reducing your DSO through improved collection processes or stricter payment terms can provide immediate cash flow benefits, essentially giving your business an interest-free loan. For B2B companies, each day of DSO improvement can free up thousands or millions in working capital that can be reinvested in product development, marketing campaigns, or hiring additional sales staff. Many growing companies fail despite strong sales because poor DSO management creates cash shortages during critical expansion phases. Regularly tracking DSO alongside other financial metrics helps leadership make informed decisions about credit policies, customer relationships, and resource allocation to support sustainable growth.
What is considered a good Day Sales Outstanding (DSO) benchmark for B2B companies?
For B2B companies, a good Day Sales Outstanding benchmark typically falls between 30-45 days, though this varies by industry with technology companies often achieving 30-40 days and manufacturing businesses averaging 40-60 days. Companies should aim to keep their DSO lower than their industry average, as each day reduction in DSO can significantly improve cash flow (for example, a $10M annual revenue business could free up approximately $27,000 in cash for each day of DSO improvement). While payment terms influence this metric (net-30 terms naturally produce different results than net-60), effective businesses typically maintain DSO within 10-15 days of their standard payment terms through streamlined invoicing processes and proactive collection strategies.
