AR & collections
Days sales outstanding, against your actual terms
DSO on its own says nothing. What matters is the gap between it and the terms you invoice on, and what that gap costs in cash.
DSO on its own says nothing. What matters is the gap between it and the terms you invoice on, and what that gap costs in cash.
Use gross accounts receivable before the allowance for doubtful accounts, and credit sales only — revenue collected at the point of sale never enters receivables and will pull the number down artificially. Countback is the better method above roughly 10% month-on-month growth, where a simple average divides current receivables by a sales figure the company has already outgrown.
Days sales outstanding is the average number of days between invoicing a customer and collecting the cash. DSO = (Accounts receivable ÷ Credit sales) × Days in the period.
The number by itself is not a verdict. A DSO of 38 is good on net-45 terms and poor on net-15. That is why the calculator asks for your stated terms and leads with the gap, which is the part you can actually act on.
Read DSO as your payment terms plus the friction between invoice and payment. Under ten days of friction is ordinary process noise and not worth a project. Twenty-five days of friction is a process problem — and it is usually on your side of the invoice, not the customer's.
The common causes are unglamorous: invoices sent at month end rather than on the contract date, a missing purchase order number, the wrong billing contact, or line items that do not match the agreement. Each one parks the invoice in a queue nobody is measuring.
The simple formula divides today's receivables by a sales figure the company may have already outgrown. Above roughly 10% month-on-month growth that distortion is material, and it runs in the flattering direction: DSO falls as sales rise, even when collections are getting worse.
Countback fixes it by working backwards through the most recent months' sales, consuming the receivables balance month by month until it runs out, and counting the days. Switch the calculator to countback if you are growing quickly — if the two methods disagree by more than a few days, growth is the reason.
The calculator converts the gap into money using your own sales per day. Collecting to terms is a one-time cash release: the money arrives once and stays. It will not repeat next year, but it needs no lender and no dilution, which makes it the cheapest cash a growing company has access to.
Running the collections process — invoicing on the day, dunning before the due date, escalating by ageing bucket — is what AR and AP management covers. The metric behind it is explained in full at days sales outstanding.