As an entrepreneur, you naturally want invoices to be paid as quickly as possible. But how do you precisely measure how long that takes on average? You do that with DSO. In this article, we explain what DSO is, how to calculate it, and more importantly, how to ensure this number goes down.

What is the meaning of DSO?

DSO stands for Days Sales Outstanding. In plain language, this means: the average number of days an invoice remains unpaid before the customer settles it.

It is an important indicator for your accounts receivable management:

• Low DSO: Your customers pay quickly. You have access to your money sooner.
  
  
• High DSO: It takes a long time before the money is in your account. This can lead to a shortage of cash to pay your own bills.

Why is DSO important for you as an entrepreneur?

Money that is still "with the customer" cannot be spent on new stock, your staff's salaries, or other things. A healthy DSO is therefore essential for your business.

Furthermore, the DSO says something about your customer relationships. Do you always have to chase your money? Then there may be room for improvement in communication or customer satisfaction. Additionally, a rising DSO across your entire industry can be a sign that the economy is cooling down and companies are becoming more cautious with their spending.

Calculate your DSO yourself

You can easily calculate your DSO yourself. You need three figures from your bookkeeping:

• Outstanding balance: The total amount of sales invoices that still need to be paid.
• Credit sales: The total revenue over a certain period (e.g., a month or a year).
• Number of days: The length of that period (usually 30 or 365 days).

The formula*:

(Total outstanding invoices / Revenue in period X) x Number of days in period X = DSO

*) Note! Use the amounts including VAT in the calculation.

Calculation example:

Suppose you look at the past month (30 days):

• There is € 30,000 in invoices still outstanding from your customers (including VAT).
• Your total revenue for that month was € 100,000 (including VAT).

The calculation is then:
(30,000 / 100,000) x 30 = 9 days

In this example, it takes an average of 9 days for your customers to pay. That is an excellent result for a business.

What does a high or low DSO mean?

Score	What does it mean?	Consequence
Low DSO	Customers pay quickly and your debtor process is in order.	Your cash flow is in order, meaning you should have money to invest.
High DSO	Customers pay slowly or reminders are left ignored.	There is a greater chance you will run short of money to cover your own costs. You may need to borrow money.

5 tips to lower your DSO

Do you want to have access to your money faster? Use these practical tips:

1. Make clear agreements!
   State your payment term large and clearly on the invoice and discuss this with the customer in advance.
   
   
2. Invoice immediately
   Don't wait until the end of the month. The sooner the invoice is sent, the sooner the payment term begins.
   
   
3. Automate your reminders
   Use software that automatically sends a (friendly) payment reminder as soon as the payment term has expired.
   
   
4. Make paying as easy as possible
   For example, use an iDEAL (Wero) payment link in your digital invoice. The easier the payment, the faster the customer will pay.
   
   
5. Call in case of delay
   A short, friendly phone call often works more effectively than sending multiple emails.

Frequently asked questions about DSO

What is a good DSO?

This differs per industry. In retail, the DSO is often very low because customers often pay immediately. In business services (B2B), a DSO of 30 to 45 days is very common. Therefore, look primarily at the trend within your company. Do you see the number rising? Then it is time to intervene.

How often should I calculate the DSO?

For most SME entrepreneurs, it is wise to do this every month. This way, you immediately see if your accounts receivable management is still effective and where you might need to adjust.

What happens if my monthly revenue fluctuates strongly?

If your revenue differs every month, the DSO calculation can result in strongly deviating figures. In that case, it is often better to work with the countback DSO.

With this method, you count "back" in time. Instead of taking an average over a fixed period, you look month by month at which sales month your outstanding invoices come from. You first subtract the revenue of the most recent month from the total amount your customers still owe you. Is there an amount left over? Then you do the same with the month before that, until the remaining number fits into the revenue of that month. Then you divide the remainder of the balance by the revenue of that month and multiply that by thirty. You must add the result of that to the number of months back times thirty days.

The big advantage of this is that you get a much fairer picture of your average payment term. A one-off peak month or a quiet period no longer distorts the result. This way, you know exactly whether your accounts receivable management is truly effective, regardless of how fluctuating your sales are. Do you need help calculating your countback DSO? Please contact one of our specialists.