Understanding days sales outstanding (DSO): formula, examples, and how it can improve your cash flow

Days sales outstanding is a measure of the average number of days that it takes a company to collect payment after a sale has been made. If you frequently trade on credit terms, it is a central indicator for assessing your ability to receive payments on time.

If you’re wondering how to calculate days sales outstanding for a given period, the DSO formula works as follows:

A good DSO ratio can vary depending on your business type and industry, but, in many industries, a DSO under 45 days is seen as strong. This indicates your cash is flowing in at an efficient rate and ready to be reinvested to generate new business.

The days payable outstanding (DPO) is your mirror indicator: it allows you to see how many days you take on average to pay your invoices.

The days sales outstanding ratio allows you to assess your ability to convert your trade receivables into cash. These, along with inventories, make up the main element of your working capital.

“A higher DSO means more cash is tied up in receivables, which can put pressure on your available cash flow,” says Steve Scott, CFAO at Allianz Trade UK  

To that effect, the DSO is a key indicator of the financial health of your company. And if it has deteriorated in recent months, you’re not alone.

Recent data suggests DSO has increased in some markets, hinting that more companies are and will continue to experiencing delays in receiving payments, which can result in cash flow problems.

Calculating your days sales outstanding is one thing. Knowing how to interpret it is another.

Working to improve your DSO only makes sense in relation to your business strategy. In theory, a company or a sector that is accustomed to selling on credit will have a higher DSO.

According to Steve Scott, “it’s not just the number that matters, but how it changes over time. Tracking trends helps you identify issues early and take action before they affect your business.” 

• Example 1: Company A is used to selling on credit on its domestic market – usually around 10 days – but is now expanding to a foreign country, with a large customer that takes longer to pay their invoices (about one month). This means Company A’s average DSO will increase from 10 to 15 days.
• Example 2: Company B has a loyal and regular customer base and usually allows a payment term of one month. For several months, its days sales outstanding has been stable at roughly 30 days.

In this case, it is company A that must be more careful despite having a lower DSO: its ability to be paid on time, and therefore its free cash flow, has decreased. Company B however is aware of its average DSO and has incorporated this figure into its strategy.

Financially speaking, in most cases, lowering DSO improves cash flow.  However, it can be beneficial commercially to offer your clients an attractive credit policy, which will raise your DSO. To get tips on finding the sweet spot between protecting your financial situation and offering attractive terms, have a look at our article on how to negotiate payment terms.

It is advisable to compare your numbers with companies similar to yours: if your days sales outstanding is well above the average in your industry, let alone in your country, you may have a problem!

Allianz Research from June 2025 shows that DSO levels have increased across many sectors as payment terms have extended.

Across sectors, those with longer average DSO figures include transport equipment (87 days), electronics (83 days) and machinery & equipment (83 days), which are all well above the global average (around 60 days). Other sectors such as chemicals (63 days) and pharmaceuticals (68 days) also recorded elevated DSO levels, while industries like retail showed comparatively lower averages.

Before expanding to a new market, check the country's average DSO in your sector as a good way to establish an adequate business strategy.

Regional patterns can also vary, with companies in APAC tending to record DSO figures above the global average. China saw an increase of +4 days in Working Capital Requirements in 2024, while Singapore rose by +2 days and South Korea by +1 day.

If you're in an industry with notoriously slow payments, such as chemicals and pharmaceuticals, late payments for exports may be standard no matter which country you choose.

It is up to you to define your business strategy: the objective is to define a target days sales outstanding that is adapted to your business.

To that effect, you can evaluate the following criteria:

The creditworthiness of your clients: How well do you know them? What is their payment history with you or with other suppliers?

Recent changes in your working capital: Has it changed significantly in recent months? Can you afford to reduce your free cash flow? For a more in-depth look at cash flow, check out our solutions to common cash flow problems.

Once your target DSO has been set, the goal is to maintain it as best you can and review it regularly, especially when you enter work with new customers or a new market.

Many factors influence your accounts receivable, and each can affect your DSO ratio. Challenges can appear across people, systems, data, and processes, and these issues often lead to late or incorrect invoices, underpayments, and delayed collections. And these can all push your DSO higher.

Understanding that problems exist is important, but identifying exactly where they happen and knowing how to fix them will benefit your business. If you analyse these processes closely, you can uncover any root causes and take action to improve your cash flow.

Here are our some of the top ways to improve days sales outstanding:

1. Negotiate better payment terms: Work with your customers to establish terms that improve cash flow, such as shortening standard payment periods, requesting advance payments for larger orders, or offering early payment discounts as an incentive. If you have clear, mutually agreed-upon terms, it will reduce delays, encourage timely payments, and help keep your DSO under control.
2. Strengthen your invoicing process: Make sure every invoice is accurate, complete, and sent promptly. Don’t forget to include all necessary details to avoid delays or disputes. A reliable, error-free invoicing process will cut the number of late or rejected payments. Carefully manage your accounts receivables: Keep a close eye on any outstanding invoices and follow up proactively with customers who haven’t paid. Your business should establish a clear recovery process for overdue payments, and, when needed, work with a debt collection agency to recover funds.

Days sales outstanding shows you how effectively you manage your cash flow and credit. When you keep it under control, you can strengthen your working capital and give your business more room to grow. However, if it starts to rise, it often means you are facing delays in invoicing or collecting payments, so it’s important to act quickly. You should aim to consistently monitor and improve it when needed, while maintaining good relations with customers.

Trade credit insurance gives you added confidence by protecting your business if a customer cannot pay, as you can offer credit, support your customers, and keep cash flow steady without taking on unnecessary risk.

If you want to take control of your DSO and protect your cash flow, contact us today to explore how trade credit insurance can support your business.