Days sales outstanding: working it out from your books
How to calculate days sales outstanding from your own balance sheet and ledger, why only credit sales count, and how to read the trend month by month.
By Achekam · · 4 min read · For Running a business businesses in South Africa, Nigeria, Kenya
"Our customers pay in about a month" is what most owners will tell you. The books often say otherwise. Days sales outstanding, usually shortened to DSO, turns that impression into a number you can track: on average, how many days pass between making a credit sale and collecting the cash.
It is one of the few ratios an owner can work out from figures already in the books, and a lender may well ask how quickly your customers pay. This article shows where to find each figure, the traps that distort the result, and how to read it.
What DSO measures
Investopedia defines days sales outstanding as the average number of days a company takes to collect payment after a credit sale. A low figure means customers pay quickly and cash comes back into the business soon after the work is done. A rising figure means more of your sales are sitting in other people's bank accounts.
DSO does not tell you which customers are slow. It tells you whether, overall, collection is getting better or worse. For the customer-by-customer view you need the aged debtors, which comes later.
The formula, and why only credit sales count
Investopedia gives the formula as:
DSO = accounts receivable ÷ total credit sales for the period × number of days in the period
Its own worked example uses receivables of $1,050,000 and credit sales of $1,500,000 over 92 days, which gives a DSO of 64.4. In other words, that business takes a little over two months, on average, to collect a credit sale.
Investopedia stresses that the calculation includes only credit sales. Cash sales are collected on the day, so including them makes collection look faster than it is. A shop that sells most goods for cash but supplies a few trade accounts on credit would otherwise see a flattering DSO while its trade accounts quietly drift past due.
Finding the two figures in your books
You need two numbers for the same period: receivables at the end of the period, and credit sales during it.
Receivables
Take the trade receivables (debtors) balance from the balance sheet at the period end. In Achekam, the management accounts show a balance sheet at period end added up from the business's own journals, and the trial balance can show each account at a date.
Credit sales
This is the harder one, because the income statement usually shows total sales. In Achekam, how sales are posted helps separate them:
- Invoice sales. All customer invoice revenue posts to one account, Professional Services Revenue (4100). Invoices are sales on credit, so this account is the main source of credit sales.
- Till sales. Every till sale that reaches the server posts revenue to account 4000, with each payment method to its own account. Most till sales are cash, card or mobile money, collected at once. Till sales charged to a customer account go to receivables (1200) and are credit sales; if you have many, add them in.
The trial balance for a period shows each account's movement, which gives you credit sales for exactly the period you choose.
Two things to keep consistent
- VAT. Receivables include VAT; sales are recorded without it. For a VAT-registered business, that pushes DSO up a little. Either accept it and be consistent every month, or adjust both figures to the same basis.
- The period. Use the same number of days as the sales figure covers. Note that the management accounts' year-to-date preset starts on 1 January, not on your own financial year start, so pick the period yourself if your year begins in another month.
What counts as good for your type of business
Investopedia states that a DSO under 45 is considered good for most businesses, while noting that what is good varies by type of business and industry. Compare yourself with your own credit terms first: a business that gives 30-day terms and runs at a DSO near 30 is collecting roughly on time; one giving the same terms and running well above that has customers paying late.
Investopedia also advises comparing DSO only with companies in the same industry and with similar business models. A freight forwarder billing large shippers and a clinic billing medical aids are not comparable, and neither is comparable to a shop.
Tracking the trend month by month
One DSO figure says little. Investopedia advises tracking DSO over time rather than relying on a single period, and notes that seasonal businesses may see it move regularly from month to month.
A simple routine:
- Each month-end, take receivables and the month's credit sales, and work out DSO.
- Record it in a running list beside the previous months.
- If it rises two months in a row, open the aged debtors. Achekam ages receivables into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals, so you can see which band has grown.
- Look at the largest balances in the older bands first. A single slow customer can move the whole figure, as the risk of one big client in receivables explains.
If DSO is rising across the board, the cause is usually your process: invoices going out late, terms not enforced, or no reminders. Our guide to a small business credit policy covers the fixes.
Read more
Investopedia's article on days sales outstanding and how to calculate it walks through the formula and its limits. Work out your DSO for each of the last few months this week, and put the running figure on the first page of your monthly management pack.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
