Term · Cash Flow & Working Capital
Days Sales Outstanding (DSO)
In briefDays sales outstanding (DSO) measures, in days, how long a company takes on average to collect invoices. It shows how much capital is tied up in outstanding receivables. Rising values at small companies can point to payment problems or aggressive revenue recognition.
Definition
Days sales outstanding (DSO) indicates how many days a company needs on average to collect its outstanding trade receivables. It links the level of receivables to revenue and is an indicator of the efficiency of receivables management. A rising DSO ties up liquidity in working capital.
How it is calculated
Formula. DSO = (trade receivables ÷ revenue) × 365
Why it matters for small caps
For small companies with tight liquidity, a lengthening DSO can be an early warning signal of customer payment problems or of aggressive revenue recognition. It directly affects the cash runway.
Common misreadings
- A low DSO is broadly rated as good, but it can also indicate factoring or advance payment, which incur other costs.
In the process
Frequently asked
What is a normal DSO?
This depends heavily on the industry and payment terms. More meaningful than an absolute value is the comparison over time and with competitors in the same industry.
Why does DSO sometimes rise suddenly?
Causes can be declining payment discipline among customers, extended payment terms to support revenue, or the pull-forward of revenue at the end of the period.
How is DSO related to the cash conversion cycle?
DSO is one building block of the cash conversion cycle, together with inventory and payables days. It specifically shows the capital tied up in the receivables balance.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.