DSO stands for Days Sales Outstanding. Behind the acronym sits a simple question: on average, how many days pass between raising an invoice and seeing the money arrive?
Working it out without software
The standard formula fits on one line. Take your unpaid client invoices at a given date, divide by your revenue for the period, then multiply by the number of days in that period.
Worked example. You have €420,000 outstanding on 30 September. Revenue for the quarter was €1,200,000. That gives 420,000 divided by 1,200,000, or 0.35, multiplied by 90 days. Your DSO is 31.5 days.
Use net figures on both sides of the sum, or gross figures on both sides, but never one of each. Mixing the two is the mistake people make most often, and it throws the answer out by around twenty percent.
What the number is actually telling you
A DSO on its own means very little. What matters is the gap against your own terms. Invoice on 30 days with a DSO of 32 and your ledger is in good shape. Invoice on 30 days with a DSO of 58 and you are lending your clients money for a month, every month, without having agreed to.
The direction of travel matters just as much. A DSO climbing three days a quarter is a warning even while it still looks respectable. It usually means the chasing has slipped, or that the mix of clients on your books has changed.
Putting a euro figure on it
This is the calculation that tends to land with an owner. One day of DSO is worth your annual revenue divided by 365. On €4 million of revenue, a single day is worth roughly €11,000.
So pulling your DSO from 58 days down to 45, a saving of thirteen days, releases somewhere around €143,000 in cash. No extra sales, no new clients, just money that is already yours arriving sooner.
Where DSO falls short
DSO is an average, and averages hide things. A DSO of 40 days can just as easily be a healthy ledger at 30 days with two large accounts sitting at 120. That is why it should always be read next to an aged debtor report, which breaks your balance down by how overdue it is.
It is also sensitive to seasonality. If you invoice most of your work at the end of a quarter, your DSO will balloon at month end for purely mechanical reasons. Compare like with like, year on year.
Where to start
- Work out your DSO for each of the last four quarters, so you are looking at a trend rather than a snapshot.
- Set it against the terms in your conditions of sale. The gap between the two is your room for improvement.
- Convert that gap into euros using the revenue divided by 365 rule. That is the number that gets decisions made.
- Then find out which clients account for the gap. In most ledgers, a handful of accounts carry nearly all of the delay.
An export of your accounts receivable and half a day is all this takes. It will not change anything by itself, but it converts a vague sense that clients pay badly into a figure you can do something about.