Knowledge

DSO Meaning: Explanation, Calculation, and Tips to Reduce DSO

Sanne de Vries March 30, 2021 Updated on: August 21, 2025

The meaning of DSO is simple: it stands for Days Sales Outstanding and indicates how many days it typically takes for your invoices to be paid. This DSO abbreviation is a key metric for monitoring the health of your cash flow and your overall DSO management process.

A low DSO means you receive payments quickly. A high DSO, on the other hand, can signal risks in your accounts receivable process, such as long payment terms or difficult collections. In this article, you’ll learn what DSO means, the DSO ratio formula, and how to reduce DSO with practical, actionable steps.

Table of Contents:

What is DSO?

The term DSO comes from the world of financial management and credit management. It is one of the most widely used KPIs to measure how quickly customers pay outstanding invoices after a product or service has been delivered. DSO is also referred to as the accounts receivable turnover in days.

Simply put: the lower your DSO, the faster you get paid. This is positive for your liquidity and reduces the risk of bad debt. A higher DSO can lead to cash flow challenges.

Why is DSO Important?

DSO is more than just a number in your accounting system. It reveals insights about:

Liquidity: How quickly cash becomes available
Risk management: The longer the payment term, the higher the risk of unpaid invoices
Growth potential: A low DSO provides more financial room to invest

A proper DSO analysis will help you spot trends in payment behavior. If you notice your DSO increasing, it’s time to act and reduce DSO before it impacts your business.

How to Calculate DSO

You can calculate DSO in several ways. The basic DSO ratio formula is:
(Open Accounts Receivable / Total Credit Sales) × Number of Days in Period

There are monthly and yearly variations:

Monthly calculation: (Accounts receivable at month-end / Average daily sales) × 30 days
Yearly calculation: (Accounts receivable at year-end / Annual sales) × 365 days

Example:
At the end of June, your total accounts receivable is $80,000 and your sales for the month are $88,000.
DSO June = $80,000 / $88,000 × 30 days = 27.3 days

In July, your accounts receivable is $60,000 with $40,000 in sales.
DSO July = $60,000 / $40,000 × 31 days = 46.5 days

Note: Sales fluctuations and exceptionally large invoices can distort DSO results.

What is a Good DSO?

Generally, a DSO under 45 days is considered healthy, but this varies by industry. In some sectors, 30 days is achievable, while others operate with longer payment cycles. Always compare your DSO with peers in your sector when setting targets.

How to Reduce DSO

A low DSO benefits every business. Here are proven strategies to reduce DSO and improve cash flow:

Invoice immediately after delivering a product or service.
Create clear, accurate invoices to avoid disputes or delays.
Offer multiple payment options such as credit card, ACH, or online payment links.
Send automated reminders as soon as payment terms expire.
Maintain open communication with customers to resolve issues quickly.
Run credit checks to assess customer risk in advance.

By automating these steps in your DSO management process, you can consistently keep your Days Sales Outstanding low.

How Payt Can Help You Reduce DSO

With Payt’s accounts receivable software, you can reduce DSO by 30–50%. Our platform:

Sends automated reminders.
Makes payment easier for customers.
Provides real-time insight with intuitive dashboards.

This way, you stay in control, save time, and get paid faster. Download our brochure below to learn more.

Download brochure

Algemene brochure

General brochure

5,000+ downloads | Read time: <5 minutes

Dental care brochure

2,000+ downloads | Reading time: <5 minutes

Pharmacy brochure

2,000+ downloads | Reading time: <5 minutes

Automotive brochure

400+ downloads | Reading time: <4 minutes

By Sanne de Vries

Sanne is a business consultant at Payt. She helps companies optimise their financial flows with attention to detail and a deep understanding of business processes.