Parag Patel

What is a good DSO?

What is a good DSO score

For many accounts receivable departments, Days Sales Outstanding (DSO) is one of the primary metrics by which they’re measured. It’s a straightforward and simple metric that answers, “how good are we at getting paid?”

It’s accepted across all industries that DSO is a reliable measurement tool. What’s not accepted, however, is what an ideal score is. It’s not difficult to define your DSO number, but it can be difficult to contextualize it.

So, what exactly is a good DSO score?

Defining a good DSO score

In general, most companies should aim for a score of 45 and under, but that comes with a lot of caveats. 

There are numerous factors that can impact what would be considered good versus poor:

  • Industry - What’s good for aerospace may be poor for textiles, for example. Companies that deal in large capital expenditures shouldn’t be held to the same standards as those that produce everyday goods or services.
  • Your own standards - What are your payment terms? Are you net 30, net 60 or something else? Your own terms should be a guide for measuring DSO.
  • Your peers - How effective are your primary competitors? Are you better or worse? 

A 2016 study surveyed companies across 27 industries and found the median DSO score for each.

Industry

Median DSO

Aerospace and Defense

66

Airlines

11

Automotive Parts and Aftermarket

47

Beverages

36

Building Products

40

Chemicals

54

Computer Hardware and Peripherals

60

Consumer Durables

48

Containers and Packaging

44

Electronic Equipment, Instruments and Components

58

Energy Services and Equipments

81

Engineering and Construction

82

Food

27

Food and Staples Retail

6

General and Specialty Retail

7

Household and Personal Care

40

Industrial Conglomerates

62

Internet and Catalog Retail

16

Machinery

57

Metals and Mining

32

Office Equipment, Services and Supplies

48

Oil and Gas

42

Pharmaceuticals

68

Semiconductors and Semiconductor Equipment

52

Telecommunications Equipment

57

Textiles, Apparel and Footwear

36

Utilities

47

 

Other DSO Calculations

While standard DSO is most commonly used, there are other forms of DSO that may provide better insights into your A/R operation. 

Of course, Standard DSO is calculated thusly:

(Ending Total Receivables / Total Credit Sales) x Number of Days in Period

Best Possible DSO

This calculates the absolute best DSO you can achieve. The closer you are to this figure, the closer you are to virtual perfection. Your terms of sale will impact it.

Calculation

(Current Receivables / Total Credit Sales) x Number of Days

Delinquent DSO

Also referred to as Average Days Delinquent, Delinquent DSO calculates the average number of days invoices are past due. It’s a very direct way of determining exactly how tardy customers are at settling their accounts.

Calculation

Standard DSO - Best Possible DSO = Average Days Delinquent

What DSO Can and Can’t Do

While DSO is a typical benchmark for A/R operations, it’s not the end all, be all. Ideally, it should be used with other metrics to create a holistic overview.

A good evaluation should include KPIs like Percentage of A/R Past Due and Days Past Due. This ensures that biases are filtered out. You may also consider a weighted form of DSO that accounts for outliers. If you have a single account that is 60 days overdue for 80 percent of your outstanding payments, your DSO will be flawed. It’s not designed for extreme cases like that.

Regardless, monitoring DSO and having a top mark in your industry is important. Being an industry leader means you’re more financially flexible than your competition and avoid unnecessary costs associated with financing or collections.

Embracing technologies like automation and payment portals will keep your score low, payments coming and provide companies and edge over their peers.

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