How to use the days sales outstanding calculator
- Enter your accounts receivable at the end of the period: what customers still owe you for credit sales.
- Enter your credit sales for the same period and the number of days in the period, such as 30, 90 or 365.
- Optionally add the receivables at the start of the period to use the average, and a target number of days of your own.
- Read the days sales outstanding, the average sales per day and, with a target, the cash tied up beyond it.
Formula
DSO = receivables / credit sales x days in the period
Average receivables = (starting receivables + ending receivables) / 2
Sales per day = credit sales / days in the period
Cash tied up beyond target = (DSO - target days) x sales per day
Using the same period for sales and days keeps the answer meaningful. If the start balance is left blank, the end balance alone is used.
$50,000 of receivables against $300,000 of quarterly sales
A business ends the quarter with $50,000 owed by customers and made $300,000 of credit sales over 90 days. DSO = 50,000 / 300,000 x 90 = 15 days. Sales per day are $3,333.33 and receivables turn over 6 times in the period.
If the balance was $70,000 at the start, the average is $60,000 and DSO rises to 18 days. With a goal of 10 days, the gap is 8 days of sales, or $26,666.67 held in receivables beyond that goal.
Reading the number
DSO tells you how long cash from a sale takes to arrive, on average. A falling DSO means customers pay sooner and more cash is free. A rising DSO means money is sitting with customers, which may call for tighter payment terms or earlier follow up.
Compare DSO with your own payment terms. If you ask for payment in 30 days and DSO is 45, the average customer is paying about two weeks late. Tools such as the early payment discount calculator and the invoice factoring calculator look at ways to speed up or buy time on receivables.
Limits of an average
DSO blends every invoice into a single figure. A few very late invoices can hide behind many prompt ones, and a month with a late surge in sales makes the figure look worse than collections really are. An aging report by invoice gives a sharper picture.
Use credit sales rather than total sales if you can, because cash sales are paid at once and pull DSO down. See also the working capital calculator for how receivables fit with the rest of your short term finances.
Assumptions and limits
- Credit sales and receivables must cover the same business and the same period.
- With no starting balance, the ending balance is used, which can overstate or understate DSO if receivables changed a lot in the period.
- The target days are your own goal, not a benchmark.
- Disputed, written off or prepaid items are included or left out only as you enter them.
Frequently asked questions
How do you calculate days sales outstanding?
Divide accounts receivable by credit sales for the period and multiply by the number of days in that period. For $50,000 of receivables and $300,000 of sales over 90 days, the answer is 15 days.
What is a good DSO?
There is no universal figure. It depends on your payment terms and how customers in your line of work behave, so the useful comparison is with your own terms and your own past periods.
Should I use ending or average receivables?
The average of the start and end balances smooths out a balance that changed during the period. The ending balance is simpler and fine when receivables are steady.
Does DSO include cash sales?
It should not. Cash sales never become receivables, so mixing them in lowers DSO and hides how long credit customers take to pay.