Days Sales Outstanding

The average number of days it takes a company to collect payment from its customers after a sale has been made.

Days Sales Outstanding (DSO) is a working capital metric that measures the average number of days it takes a company to collect payment from its customers after a sale has been made on credit. It serves as a key indicator of a company's credit and collection efficiency, showing how long cash is tied up in accounts receivable rather than being available to fund operations, pay down debt, or reinvest in the business. To calculate DSO, the average accounts receivable balance over a specific period is divided by the total credit sales during that same period, and then multiplied by the number of days in that timeframe (typically 365 days for an annual calculation). Because cash sales do not generate receivables, including cash sales in the denominator can artificially lower the DSO and distort the true collection timeline, so analysts prefer using net credit sales when the data is available. Investors monitor DSO to assess customer credit quality and cash flow health. A rising DSO suggests that a company is taking longer to collect payments, which could point to customer financial distress, loose credit terms used to artificially boost sales, or inefficiencies in the collections department. Conversely, a low or declining DSO is generally positive, indicating prompt collections, high liquidity, and a lower risk of bad debt write-offs. However, an extremely low DSO might indicate that credit policies are too restrictive, which could turn away potential customers and hurt revenue growth.

Company A has an average Accounts Receivable balance of $15,000,000 over the year and generates $90,000,000 in credit sales. Its DSO is calculated as: ($15,000,000 / $90,000,000) 365 = 0.1667 365 = 60.8 days.