You have delivered the work and sent the invoice. DSO is how long you wait before you can spend the money.
You invoice a customer $50K on January 1. They pay on February 15. That is 45 days without the cash, while payroll and rent carry on regardless.
Scale it up. If customers typically take 45 days and you bill $1M a month, you are permanently waiting on around $1.5M of delivered, invoiced, unpaid work.
Calculating it
DSO is accounts receivable divided by revenue, multiplied by the number of days in the period.
With $500K in receivables and $200K of revenue over the last 30 days, DSO is ($500K / $200K) × 30, which is 75 days. On average your customers take 75 days to pay.
Read it next to the aging report. If most receivables are current, under 30 days, the number is healthy. If most sit at 90+ days, the average is hiding something.
What it costs you
At a DSO of 60 days on $200K of monthly revenue, you are waiting on $400K at any moment. That $400K is yours. You delivered the work. You simply cannot spend it.
For a growing company this is how you run out of money while doing well. Take three months. January bills $50K and collects $25K. February bills $100K, which is growth, and collects $50K. March bills $150K and collects $100K, with $100K still owed from February and $75K from March.
By the end of month 3 you have generated $300K of revenue and collected $175K. You are $125K down on working capital in a quarter where everything went right. Run out of cash before those payments land and the consequences are real.
Bringing it down
State the terms on the invoice. If it does not say due within 30 days, customers will assume whatever suits them. Net 30 is the B2B norm, net 15 collects faster, and net 60 or net 90 should be kept for large enterprise contracts.
Then make the invoice easy to pay.
- Your details and the customer's
- A unique invoice number and the invoice date
- The due date, stated plainly
- Itemized products or services, and the total due
- How to pay: bank details, ACH, a card link
- Any early payment discount
Send it the day you deliver. Waiting 5 days to send a net 30 invoice turns it into a 35-day wait.
Chase on a schedule rather than when you happen to remember.
- On the due date: a reminder
- 5 days overdue: a friendly email
- 10 days overdue: a phone call
- 20 days overdue: escalate, because something is wrong
- 30 days overdue: collections may be needed
Offer a discount for paying early. On a $10K invoice due in 30 days, 2% off for payment within 10 days leaves you $9,800. It costs $200 and brings the cash forward by 20 days, which is a good trade when you need the cash.
Accept card, ACH, wire and check. Every method you leave out is a reason to pay you later.
Involve sales. A rep who closes with a heavy discount and net 90 terms has created a cash problem that finance inherits. DSO belongs to sales as well.
If DSO is choking cash flow and customers will not move, factoring sells unpaid invoices to a lender at a discount for immediate cash, and a credit line covers working capital. Both are expensive, and sometimes they are the right call.
Habits that keep it low
Enforce your own policy. Being lenient with one customer teaches every other customer what is possible.
Track DSO per customer as well as overall. The ones who always pay late may need different terms, or a price that reflects the wait.
Watch the trend. Moving from 40 to 50 to 60 days is the signal, long before any single invoice looks alarming. The B2B benchmark sits around 30 to 45 days, and government contractors routinely wait 90+ days because that is simply how they work.
Written by the team at Ambivo, a business platform that keeps CRM, accounting and ERP on one customer record. This article is general guidance on the topic rather than a description of Ambivo features.