DSO, average collection days: how to calculate it and what it tells you about your customers
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In brief: DSO (Days Sales Outstanding) is the average number of days between a sale and its collection. It is calculated by dividing trade receivables by revenue for the period and multiplying by the number of days in the period. Compared with the payment terms you grant, it tells you how many days of delay you are financing for your customers. Calculated customer by customer, it tells you who is getting worse before a bad debt arrives.
What is DSO?
It is the most widely used measure of how quickly you collect. A DSO of 75 days means that, on average, a euro invoiced today comes into the cash box 75 days later. Every extra day is cash you are lending to your customers, for free, that you have to cover with your own funds or with the bank.
Its counterpart is DPO, the average number of days you take to pay suppliers. The difference between the two, together with inventory days, tells you how long you have to finance the cycle. The DPO of your customers, derived from their financial statements, is explained in the guide on how to tell whether a company pays its suppliers.
How is DSO calculated?
Simple method
DSO = trade receivables ÷ revenue for the period × days in the period
Two points to watch: receivables in the accounts include VAT, so use revenue including VAT; and use the same period for both figures.
Hypothetical example: at the end of the quarter you have €180,000 of trade receivables. In the quarter you invoiced €200,000 incl. VAT. DSO = 180,000 ÷ 200,000 × 90 = 81 days.
Count-back method
The simple method is misleading if revenue varies a lot from one month to the next. The count-back method is more accurate: you start from open receivables and 'use up' the revenue of the most recent months until they are covered.
| Step | Calculation (hypothetical example) |
|---|---|
| Open receivables at 31 October | €180,000 |
| October revenue, 31 days | €70,000 → €110,000 left, 31 days counted |
| September revenue, 30 days | €60,000 → €50,000 left, another 30 days counted |
| August revenue, 31 days | €40,000: €50,000 needed, so you count all of August and continue |
| July revenue, 31 days | €80,000: only the last 10,000 is needed, that is 10/80 × 31 ≈ 3.9 days |
| DSO | 31 + 30 + 31 + 3.9 ≈ 96 days |
The same portfolio with the simple method over the August-October quarter would give 180,000 ÷ 170,000 × 92 ≈ 97 days: here the two methods are close, but with a peak month the differences become large.
DSO and average days late
DSO alone does not tell you whether you have a problem: 90 days is normal if you grant 90 days, but it is an alarm if you grant 30. For this reason you also calculate an 'ideal' DSO, the one you would have if everyone paid exactly on the due date, that is the average payment term granted, weighted by revenue. The difference is the average delay:
Average days late = actual DSO − average payment term granted
If you grant 60 days on average and the DSO is 81, you are financing 21 days of delay. On €800,000 of annual revenue incl. VAT, 21 days are worth about 800,000 × 21 ÷ 365 ≈ €46,000 of idle cash.
DSO by customer: where the risk shows
Company-wide DSO is an average that hides individual cases. Calculate it also for your top twenty customers by revenue, every month or every quarter:
- Stable DSO close to the payment term: customer in order.
- Consistently high but steady DSO: a slow customer by habit; consider shortening the terms or charging late-payment interest.
- DSO rising for two or three periods in a row: this is the signal that matters. The customer is using you to finance itself. Check its rating, credit line and insolvency signals again before the next delivery.
Remember the signal indicated by the Business Crisis and Insolvency Code (Codice della crisi d'impresa, art. 3, para. 4): debts to suppliers overdue by at least 90 days, for an amount greater than those not yet overdue. If a customer consistently pays you more than 90 days after the due date, you may not be its only supplier in that situation.
Can you calculate the DSO of another company?
Yes, approximately, if it files its financial statements. Take trade receivables from the assets side of the balance sheet (item C.II.1 of the schedule in article 2424 of the Italian Civil Code) and sales revenue from the income statement (item A.1), adding VAT if the company sells in Italy. A very high DSO compared with the sector may mean weak customers or receivables that are hard to collect, that is a risk your customer could pass on to you. How to read the rest of the financial statements: practical guide to a customer's financial statements.
How do you reduce DSO?
- Invoice immediately: every day between delivery and invoice is an extra day of DSO.
- Check before granting terms: the right terms for each customer are decided at the start. See SME credit policy.
- Send reminders on a fixed schedule, not when you happen to remember.
- Apply late-payment interest to habitual late payers: in the second half of 2026 the statutory rate is 10.40%. Details in late-payment interest 2026.
- Review the credit line when a customer's DSO rises: the method is in the guide on credit limit.
Sources
- Italian Civil Code, art. 2424 and art. 2425 (Normattiva)
- Legislative Decree (D.Lgs.) 14/2019, art. 3 (Normattiva, accessed 11/11/2026)
- Legislative Decree (D.Lgs.) 231/2002, art. 5 and the rate for the second half of 2026 published in the Official Gazette (GU) no. 163 of 16/07/2026
Frequently asked questions
What is DSO?
Days Sales Outstanding: the average number of days between the sale and collection. It is calculated by dividing trade receivables by revenue for the period, VAT included, and multiplying by the number of days in the period.
What is a good DSO?
It depends on the payment terms you grant. A DSO close to the average payment term granted indicates punctual customers; the difference between the two is the average delay you are financing.
Is the simple method or the count-back method better?
The simple method works well if revenue is regular. If you have peak months, the count-back method, which uses up the revenue of the most recent months until it covers open receivables, is more accurate.
Why calculate DSO for each individual customer?
Because the company average hides individual cases. A customer whose DSO rises for two or three periods in a row is getting worse: it is time to check them again and review the credit line before the next delivery.
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Check the customer driving your DSO upFurther reading on this topic
- Commercial credit risk: what it is, how to measure it and how an SME can reduce it (2026)
- Company credit score: what it is, how it is calculated and how to read it before extending credit
- Company credit limit: what it is, how it is estimated and what to do if you exceed it
- Probability of default (PD) and expected loss: how to estimate how much you risk on a customer
- SME credit policy: the 8 rules to write down on credit lines, payment terms and reminders
- How to tell whether a company pays its suppliers: payment experiences and public data
- Late-payment interest in commercial transactions 2026: 10.40% rate, calculation and €40