Key Takeaways
- Days Sales Outstanding (DSO) is a critical KPI that measures how efficiently your company collects payments.
- Understanding your DSO KPI helps evaluate invoicing practices, credit terms, and financial projections.
- The most efficient companies maintain a DSO of 30 days or less, though industry averages vary significantly.
- Automation for DSO improvement can reduce collection times and increase cash flow visibility.
Every financial leader knows that cash flow is the lifeblood of business operations. One key performance indicator (KPI) that provides particularly valuable insight into your cash flow health is Days Sales Outstanding (DSO). This metric doesn’t just tell you how long it takes to collect payment—it reveals the effectiveness of your entire accounts receivable process within your ERP environment.
A DSO KPI analysis shows you how efficiently you’re collecting payment for products or services, and directly relates to your company’s operational cash flow. By knowing how many days your sales are held up in receivables, you can strategically evaluate your invoicing practices, credit terms, and financial projections to make more informed decisions.
How to Calculate Your DSO KPI
To calculate your DSO KPI, you’ll first need to select an appropriate reporting period. Most organizations run these reports monthly, quarterly, or yearly. Shorter periods generally don’t provide a large enough sample to accurately reflect your performance.
The standard formula for calculating DSO is:
- Divide your accounts receivable balance for your specific reporting period by its total credit sales
- Multiply that result by the number of days in the period (365 for a yearly metric, 92 days for Q3, etc.)
For example, if your company has $10 million in accounts receivable and $30 million in credit sales for a 90-day period, your DSO would be: ($10 million ÷ $30 million) × 90 = 30 days.
What’s the Average DSO?
According to an APQC survey published in CFO magazine, the most efficient companies report a DSO KPI of 30 days or less. The longest DSOs were in the 48-day range, while 36 days was the median across industries.
When comparing your DSO to these averages, it’s important to note that many factors influence accounts receivable performance. For certain companies, even 48 days, which the APQC study categorized as “poorest performance”, might actually represent excellent performance for their particular industry.
Average DSO by Industry
Industry norms significantly impact what constitutes a “good” DSO. According to research from SageWorks, several industries typically operate with a DSO of 60+ days:
| Industry | Average DSO |
| Management consulting | 125.07 |
| Oil and gas extraction | 110.86 |
| Technical and trade schools | 109.32 |
| Automotive equipment rental and leasing | 104.35 |
| Outpatient care centers | 98.99 |
| Mining support | 90.76 |
| Architectural and engineering services | 74.36 |
| Scientific research and development | 70.75 |
| Foundation, structure, and building exterior contracting | 67.46 |
| Heavy and civil engineering construction | 66.51 |
To put your DSO into proper perspective, you should benchmark against the average expectations in your specific industry. If competitors typically have longer payment cycles, yours may legitimately be on the longer side as well; it could simply reflect your industry’s standard business model rather than a collection problem.
Factors Affecting Your DSO KPI Measurement
Seasonal Sales Fluctuations
Just as certain industries have “slow seasons,” many companies experience periods when their DSO KPIs are higher than normal. If your current accounts receivable balance includes one or two large orders that are several months old, that can cause your numbers to appear worse than they actually are.
DSO calculation methods that focus on a 12-month average don’t account for periods where monthly sales are higher (or lower) than the norm. This is why most organizations use a monthly or quarterly KPI, then compare their current number to the benchmark from the same period in the previous year for more accurate analysis.
Customer Base Composition
Another factor to consider: many organizations offer more lenient payment terms to larger customers. For example, a major account that provides a substantial share of a company’s revenue may be given 60 or 90 days to pay, while smaller accounts may be required to pay more quickly. Even a few such accounts can increase the average number of days that your sales go uncollected.
Depending on your invoicing terms, you’ll likely want your DSO to fall within 20 percent of your standard policy. For instance, if you request payment from typical customers within 30 days, your target DSO should be 36 days or less.
The Impact of High DSO on Your Business
A high DSO indicates delayed cash inflows, which can significantly disrupt your company’s financial health and operational efficiency. Understanding the consequences of elevated DSO is critical for developing effective strategies to optimize cash flow and support sustainable growth.
- Reduced operational cash flow affecting day-to-day operations: When payments are delayed, your available cash decreases, limiting your ability to fund essential activities and investments.
- Increased reliance on credit lines or loans to cover overhead: To bridge cash shortfalls, businesses often turn to external financing, which increases interest expenses and financial risk.
- Higher collection costs from pursuing late payments: Managing overdue accounts demands additional resources, diverting time and money from core growth initiatives.
- Potential strain on supplier relationships due to your own delayed payments: Cash flow challenges can cause delays in paying your suppliers, potentially harming partnerships and negotiating power.
If your DSO KPI remains high, the impact on cash flow can be severe, forcing you to develop interim solutions to cover overhead while waiting for customer payments. Moreover, excessive reliance on collections agencies not only increases costs but also detracts focus from strategic priorities that drive business expansion.
Strategies to Improve DSO
There are several proven approaches to improve your days sales outstanding KPI and enhance your cash flow management:
1. Reevaluate Credit Policies
Start by reviewing your credit approval process. Are you extending credit to customers who consistently pay late? Consider implementing more rigorous credit checks before approving new customers for payment terms. For existing customers with poor payment history, you might need to adjust their terms or require deposits for future orders.
2. Optimize Invoicing Processes
One of the most effective ways to improve DSO is to invoice customers more quickly and accurately. Within enterprise ERP systems like SAP S/4HANA or Oracle E-Business Suite, intelligent capture technology can automate invoice generation immediately after goods or services are delivered, eliminating delays in the billing cycle.
3. Offer Early Payment Incentives
Many companies find success by offering discounts for early payment. A common approach is offering a small percentage discount (typically 1-2%) if payment is made within 10 days instead of the standard 30. This not only improves your DSO KPI but can also strengthen customer relationships.
4. Implement Automation for DSO Improvement
Business process automation with advanced workflow capabilities can dramatically reduce your days sales outstanding. Companies implementing AR automation report significant improvements:
- 85% of CFOs report decreased DSO after implementing automation solutions
- Automated invoicing can reduce processing time by up to 70%
- Electronic payment options can accelerate collections by 15-20 days
5. Monitor Collection Effectiveness Index (CEI)
While focusing on your DSO KPI, also track your Collection Effectiveness Index (CEI). This complementary metric measures the percentage of receivables successfully collected in a given period. The formula is:
CEI = (Beginning AR + Monthly Credit Sales – Ending AR) / (Beginning AR + Monthly Credit Sales – (Ending AR × Payment Term/30))
A CEI of 85% or higher indicates effective collection processes, while scores below 50% suggest immediate improvement is needed.
Beyond DSO: Other Important Accounts Receivable KPIs
Days sales outstanding is just one financial KPI to monitor, albeit a critical one. For comprehensive accounts receivable management, also consider these metrics:
- Average Days Delinquent (ADD): The number of days that pass from an invoice’s due date to the date it’s actually paid
- Collection Effectiveness Index (CEI): The number of invoices collected compared to the number of invoices sent out
- Accounts Receivable Turnover Ratio: The net value of your credit sales compared to your average accounts receivable balance
- Bad Debt to Sales Ratio: The percentage of sales that become uncollectible
How Automation Enhances DSO KPI Management
Automating key processes within the accounts receivable cycle, from invoice delivery to payment reconciliation, can significantly improve DSO performance and cash flow.
- Accelerates invoice delivery through electronic channels: Automation enables faster, more accurate invoice generation and distribution, reducing delays in billing and improving cash flow.
- Reduces payment processing time with integrated payment options: Seamless integration of payment gateways and ERP systems streamlines payment reconciliation, shortening the days sales outstanding (DSO).
- Automates payment reminders at strategic intervals: Automated, timely reminders improve collection rates without straining customer relationships, helping maintain steady cash inflows.
- Provides real-time visibility into receivables aging without requiring ERP logins: Dashboards and analytics tools offer instant insights into outstanding invoices, enabling proactive management of overdue accounts.
- Seamlessly integrates with SAP, Oracle, and other enterprise ERPs: IntelliChief’s intelligent capture and automation solutions connect smoothly with SAP ECC, SAP S/4HANA, Oracle E-Business Suite (EBS), Oracle JD Edwards, and Infor Global Solutions, ensuring data consistency and process efficiency.
IntelliChief’s accounts receivable solutions make it possible to invoice customers more quickly, reduce lead times, and gain enhanced visibility into your entire order-to-cash cycle.
Our intelligent capture technology integrates seamlessly with enterprise-class ERP systems, including SAP ECC, SAP S/4HANA, Oracle E-Business Suite (EBS), Oracle JD Edwards, and Infor Global Solutions.
Improving Your DSO with IntelliChief
Managing your DSO KPI effectively requires both strategic planning and the right tools. IntelliChief’s AI-enabled automation platform provides the capabilities financial leaders need to optimize accounts receivable processes while maintaining seamless integration with your existing ERP systems.
Our solution streamlines the entire AR workflow from invoice generation to payment application, providing real-time visibility into receivables aging without requiring ERP logins. The platform’s advanced workflow capabilities ensure that collection activities happen at the right time, with the right customers, improving both efficiency and effectiveness.
Ready to improve your accounts receivable metrics? Contact IntelliChief today to learn more about reducing your DSO KPI and meeting other crucial financial goals with strategic AR automation that integrates with your enterprise systems.