What Is Days Sales Outstanding (DSO)?

The Association for Financial Professionals (AFP) gives the formula for days sales outstanding (DSO) as follows:

DSO = (average accounts receivable ÷ net revenue) x 365

• Average accounts receivable: the average amount customers owe over the period, usually the beginning and ending AR balances added together and divided by two.
• Net revenue: total revenue from sales, minus any returns or discounts, over the same period.
• 365: the days in a year, which turns the ratio into days.

The result is how many days, on average, it takes to get paid after a sale. A result of 45 means about 45 days.

DSO only measures credit sales, so cash sales aren't included. A business with a large volume of cash sales will naturally show a lower overall DSO than one that sells mostly on credit. DSO is also one part of the cash conversion cycle, which measures how long it takes a company to turn its investment in inventory and other resources into cash from sales.

AFP says a high DSO means the business is waiting a long time to get paid, which can strain cash flow. A rising DSO can be a warning sign: customers may be unhappy, sales teams may be offering extended payment terms to close deals, or the business may be taking on customers with poor credit.

In general, lower is better, but what counts as a good DSO depends heavily on the industry. AFP's advice is to compare a company's DSO with its own history and with industry benchmarks, and to track it over time, since seasonal businesses can show regular swings.

AFP lists practices that help:

• Setting and monitoring credit limits, and extending credit only to customers who meet your standards
• Sending accurate invoices consistently, with clear due dates and terms
• Considering shorter payment terms, communicated to customers in advance
• Offering a discount for paying early
• Sending automated reminders before due dates and after late payments
• Talking directly to customers who are chronically late
• Resolving billing disputes promptly

An industrial supply distributor sells on net 30 terms. For the year:

• Beginning accounts receivable: $460,000
• Ending accounts receivable: $540,000
• Net revenue: $7,300,000

Average AR is ($460,000 + $540,000) ÷ 2 = $500,000. DSO is ($500,000 ÷ $7,300,000) x 365 = 25 days. Buyers pay, on average, in 25 days, inside the 30-day terms. If the same revenue had come with average AR of $800,000, DSO would be ($800,000 ÷ $7,300,000) x 365 = 40 days, ten days past terms and a sign to look at collections.

Shopify B2B, on the Basic, Grow, Advanced and Shopify Plus plans, holds the terms behind each receivable:

• Payment terms: net 7, net 15, net 30, net 45, net 60 or net 90 from the day the order is placed, or due on fulfillment.
• Overdue orders: buyers can pay from customer accounts with Pay now up to the due date. After the terms expire they can still pay, but the order shows as Overdue, and you can create an orders view of everything that is Due.
• Payment reminders: Shopify lists them among the B2B features on all four plans.
• Collecting: payments aren't captured automatically when terms expire. You charge a saved card from the admin, and a vaulted bank account can be debited from the admin or automatically with Shopify Flow.

Uncap Portal puts NET terms, invoices, and payments in the portal, so buyers reorder, track, and pay from a portal built for their account.

• Accounts receivable
• Net 30
• Trade credit
• Order-to-cash
• ACH payment
• Credit memo

• Association for Financial Professionals: Days Sales Outstanding (DSO)
• Shopify Help Center: Setting up payment terms in B2B
• Shopify Help Center: Shopify B2B features by plan