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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • USA
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      • Australia
      • New Zealand
  • Hi-Tech
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    • UK Fintech
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      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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    • Economic Indicators
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      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
        • Credit Insurance Legal Aspects
      • Credit Suisse Bailout
  • Credit Insurers
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    • Articles
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      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
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Home Invoice Finance

What is Days Sales Outstanding?

John Goodden by John Goodden
January 26, 2023
in Invoice Finance
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What is Days Sales Outstanding?
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Download file | Play in new window | Duration: 5:59 | Recorded on September 2, 2022

Days Sales Outstanding (DSO) is a metric used in financial accounting to measure the number of days, on average, that a company takes to collect its accounts receivable.

Days Sales Outstanding is usually considered along with the metrics of Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO). Together these three metrics can be used to calculate the cash conversion cycle (CCC).

How is Days Sales Outstanding Calculated?

The formula for calculating days sales outstanding is:

DSO = Accounts receivable x number of days / total credit sales

Where accounts receivable = the cash total of unpaid invoices for a specified period of time. The amount is either an average over the period in question or the final amount at the end of the period. This figure is a proxy for a company’s average unpaid receivables.

Where number of days = the time period specified in the accounts receivable calculation.

Where total credit sales = all the money coming into the company from sales for the period in question. Again this can be an average over the period in question or the final amount at the end of the period. This is a proxy for how fast the company is being paid for sales.

As an example, a company has accounts receivable worth £150,000 for a year period. In that period the total credit sales were £800,000. Thus:

DSO = 150,000 x 365 / 800,000 = 68.4 Days

How to Interpret DSO

As with the calculations for DIO and DPO, it is important to judge the DSO figure in light of how other companies in the same sector fare. The average lag period between a sale and a paid invoice varies from sector to sector.

High DSO

DSO is calculated in days. The higher the number of the days it takes for accounts to be paid up, generally the worse it is for a company. A high number indicates the company is making a lot of sales offering credit. The problem with a high DSO is that it shows that money is being tied up in unpaid invoices. This causes problems for working capital. It is money that has been earnt but is not available for use in buying more materials, paying wages and utility bills, research and development etc.

Low DSO

If the DSO is low – perhaps under 30 days – it indicates good financial health for a company. They are being paid promptly by their customers. This is a great situation to be in: the pot for cash flow is always nicely stocked, and there should be no problems paying for raw materials and other expenses.

How to Improve DSO

If a company is struggling with a high DSO, there are a number of areas that can be looked at to shorten payment times and bring down DSO. They are:

  • Making the accounts receivable department more efficient. It is possible to speed up the collection of money owed by analysing the payment behaviour of regular customers and identifying the slow payers. It is then possible to look at ways of encouraging timely payment for these customers.
  • Automation. It is now easy to use software that automatically invoices clients digitally. This is faster than generating paper invoices and using the postal service. Further automation can link purchase orders to invoicing, so that as soon as an order is made an invoice is sent. Integrating the company accounting system with the client’s further streamlines the process.
  • Using Trade Receivables Finance. This method involves using a third party to pay the invoice. It is called factoring – where a factoring company releases up to 90% of the value of an invoice immediately. The factoring company chases up the debt and when the invoice is paid by the debtor, the factoring company takes its fees and sends the remaining money to the company who raised the invoice. There are a number of factoring options available. Using factoring does cost money but it allows a company to plan its finances and avoid cash flow issues.
  • Offer Early Payment Discounts. These incentivise early payment of invoices. A company offers terms whereby a client is given a discount for paying early. Typically, a 2% discount might be offered if an invoice is paid off within 10 days. As they say, money talks. Those clients able to take advantage of early payment discounts will improve their financial health and at the same time the seller will improve their DSO figure.

Cash Conversion Cycle

One of the main uses of Days Sales Outstanding is in the calculation of the cash conversion cycle. This is an essential accounting tool that derives a number for how long, on average, it is taking for money to be spent on materials; those materials to be made into inventory; and then for that inventory to be converted back to sales and cash once an invoice is paid. It is the cycle of turning cash into product and then product back into cash. If the cash conversion cycle is long then money is being tied up that could be used for working capital.

The formula for the cash conversion cycle is:

CCC = DIO + DSO – DPO

Where DIO = Days Inventory Outstanding

Where DSO = Days Sales Outstanding

Where DPO = Days Payable Outstanding

Use the links on the terms to delve deeper into each metric.

In Summary

The Days Sales Outstanding is a key metric used in company accounting to assess how promptly payments for goods sold are taking. It can be measured over time to monitor whether clients are taking more or less time to pay than usual.

As discussed, there are a number of actions available to a company that wishes to reduce its DSO and thus improve cash flow. These measures range from automating invoices, to using third party factoring firms.

Finally, DSO is an important metric that can be used to calculate the cash conversion cycle when used in tandem with DIO and DPO.

Tags: cash conversion cycledays payable outstandingdays sales outstandingearly payment discountsfactoring
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
    • North America
      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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    • Economic Indicators
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      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
    • Markets in Crypto Act (MiCA) Becomes EU Law
    • An Introduction to EU’s Markets in Crypto-Assets (MiCA) Law 
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    • The DeFi Revolution
    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
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    • Interview with Kyriba
    • Interview with Orbian
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