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DSO is a key indicator of a company’s financial health. It plays an important role in cash flow management: the lower the DSO, the stronger the company’s cash position. This is why it is essential to monitor it closely and analyse its performance over time.
In this article, we explain in detail the different DSO calculation methods. And because theory is not enough, LeanPay’s software automatically includes DSO in its collection reporting, calculated in real time, both across your entire customer portfolio and for each individual customer.
What is DSO? Definition and meaning
DSO stands for Days Sales Outstanding. It measures the average number of days between issuing an invoice and receiving payment from a customer.
In practice, DSO shows the portion of billed revenue not yet collected: literally, the number of days it takes to get paid.
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Implemented in just a few weeks before summer 2023 with a fully operational Sage 100 connector. Our group's goal of reducing DSO by 40% was achieved in less than a year thanks to Leanpay!
Bruno G. - CFO
Why is DSO important?
DSO is a key performance indicator in accounts receivable management. Tracking Days Sales Outstanding helps companies identify payment delays and evaluate collection efficiency.
A low DSO means customers pay faster, freeing up cash flow. 👏
A high DSO means longer payment terms, exposing the business to cash gaps. 😯
DSO is also a major component of Working Capital Requirement (WCR). It reflects billing cycles, customer payment behaviour, and the effectiveness of credit control. Its evolution can highlight improvements (or deterioration) in credit risk.
With LeanPay, you can monitor DSO, outstanding receivables, monthly turnover by overdue and not-yet-due invoices, and your aging balance. All in real time, with clear dashboards. Automated reminders cut collection time by 75% and significantly reduce late payments.
Monitoring your company’s DSO also enables you to make strategic decisions for your cash flow. When persistent late payments are observed from certain customers, often referred to as bad payers, you can adapt your approach by negotiating specific payment terms. For example, you may require them to pay a deposit systematically before delivery.
How to calculate DSO? (Days Sales Outstanding formulas)
There are several ways to calculate DSO. The important point is consistency: choose one formula and track its evolution over time.
The standard accounting formula
This is the most common approach. It measures the ratio between total receivables and total sales (incl. VAT) for a given period:
DSO calculation formula = (Accounts receivable / Total sales) x Number of days in the period
✅ Advantages:
- Simple to calculate.
- Easy to compare across companies.
- Data readily available.
❌ Limitations:
- Only relevant if sales are stable (seasonality distorts results).
- Does not reflect the ageing of receivables or the actual credit period.
Variants of this method include:
- Total receivables method: End-of-month receivables x days / total sales.
- Average receivables method: Average receivables over the period x days / total sales.
- Average sales method: End-of-month receivables x days / average sales.
- Current receivables method: Non-due receivables x days / total sales (excluding cash sales).
- Overdue receivables method: Overdue receivables x days / total sales → gives Average Collection Delinquency (ACD).
All clear so far? Good ! Let’s move on to the second calculation method…
The “Count Back” or “Roll-Back” method
This method subtracts sales figures month by month from total receivables until the balance is cleared. It provides a more dynamic and realistic view, especially for seasonal businesses.
Overall, for monthly monitoring, the formula for calculating DSO can be expressed as follows:
DSO (end of month) = outstanding amount (incl. VAT) - turnover (incl. VAT) for month M - turnover (incl. VAT) for month M-1 … until the customer balance is cleared.
Then, the (partial) amount of the last month’s turnover for the period, divided by the total turnover and multiplied by the number of days in the month, gives the residual number of days to be added to the days already counted for the previous months.
Let’s look at an example using this “turnover depletion” method to make things clearer.
If we carry out the calculation at the beginning of May 2025, we start with the gross receivables balance of 170 000 € as at 30 April 2025.
Step 1. Start from the outstanding amount on 30 April 2025 of 170 000 € and subtract April’s turnover of 40 000 €. This leaves 130 000 €. We then add the full number of days in April to the DSO column, i.e. 30 days.
Step 2. We repeat the same operation for March: 130 000 € - 70 000 € = 60 000 €. Again, we note down the full number of days in March.
Step 3. At 28 February 2025, the outstanding amount is now 60 000 €, compared to a total turnover of 95 000 €. The calculation is therefore: 60 000 € / 95 000 € x 28 (days in February) = 17.68 days. The contribution to the DSO as of early May 2025 for this period is therefore 17,68 days.
Step 4. We add up the total number of days from the DSO column: 30 + 31 + 17,68 = 78,68 days.
Step 5. The DSO observed on 1 May 2025 is therefore 78,68 days.
✅ Advantages:
- Reflects seasonal variations.
- Provides real-time insight (if data updated daily).
❌ Limitations:
- Less suitable for benchmarking across companies.
- Requires frequent updates (difficult with outsourced accounting).
👉 LeanPay uses this second method to calculate your DSO in real time, giving you instant visibility on receivables and payment delays.
5 techniques to optimise your DSO
Reducing DSO improves liquidity and reduces financing needs. Here are five proven strategies:
1 – Ensure flawless invoicing
Good invoicing practices are the foundation of healthy cash flow.
- Make sure your invoices are accurate, compliant with legal requirements, and include clear payment terms (also stated in your GTC).
- Negotiate the shortest payment terms possible at the start of the relationship.
- Issue invoices promptly, ideally as soon as the product is delivered or the service completed, while the value is still fresh in the customer’s mind.
- Keep accounts reconciled regularly. Tools like LeanPay help automate this process and save time.
- Track outstanding amount carefully to spot issues and improvement opportunities.
2 – Assess your customer’s profile
Before extending credit, it pays to know who you’re dealing with.
- For new customers, check sources such as Companies House or OpenCorporates. LeanPay also provides free access to an up-to-date database of all sanctioned companies since 2015. Finally, do not forget the credit reports provided by financial information agencies.
- For existing customers, analyse their payment history with you to decide whether to adjust your collection approach or offer alternatives such as a payment plan.
3 – Limit the impact of risk on your cash flow
Some risks are inevitable, but you can prepare for them:
- Factoring provides immediate liquidity, but at a cost.
- Early payment discounts can accelerate cash inflows while strengthening customer relationships.
- Trade credit insurance offers protection against defaults, though it requires close monitoring of cover limits and notice periods.
- LeanPay integrates with Creditsafe, Altares, Coface, Alllianz Trade and Ellisphere to provide real-time risk scoring and recommended credit limits.
4 – Follow up on overdue invoices effectively
No overdue invoice should slip through the cracks.
- Create a structured dunning plan with reminders adapted to customer profiles. With LeanPay, you can automate early reminders and standard sequences, while keeping control of manual follow-ups. You define sequences of actions over time. Action no. 1 : send a preventive reminder five days before the due date. Action no. 2: send a first reminder email after five days of delay, and so on.
- Personalised messages (including key details and invoice copies) have greater impact than generic reminders.
- Escalate communication channels progressively: from email or SMS to phone calls or registered letters when needed.
This may seem like a large number of tasks to manage, but many can be automated with LeanPay’s accounts receivable software. This is where you gain efficiency and save valuable time. For example, pre-due reminders and first-level chases can be sent automatically. For all other reminders, tasks are pre-prepared in advance and only require a simple manual validation.
5 – Offer convenient payment methods
The easier you make it for customers to pay, the faster you’ll get paid.
- Provide several payment options, such as instant transfer or card payment.
- Offer them at the right moment: not when issuing the invoice, but when it becomes due. With LeanPay, reminders by email and SMS include a “Pay my invoices” button that takes the client directly to a secure payment portal.
In practice, combining these methods with LeanPay’s collection software typically reduces DSO by at least 40%.
FAQs about DSO
What does DSO stand for?
DSO stands for Days Sales Outstanding. It measures how long it takes for a company to collect payment after a sale.
What is the DSO formula?
The most common DSO formula is: (Accounts receivable ÷ Sales) × Number of days in the period.
How to calculate Days Sales Outstanding?
You can calculate DSO using the standard accounting formula or the roll-back method. The choice depends on your company’s sales patterns.
Why is DSO important?
Because it directly impacts cash flow. A lower DSO means faster collections and stronger liquidity.
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