Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO)

Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO) are key metrics that reveal how quickly you collect payments from customers and how long you take to pay suppliers. Together, they help you understand and manage your cash conversion cycle.

Days Sales Outstanding (DSO)

DSO measures the average number of days it takes to collect payment after making a sale. A lower DSO means you are collecting cash faster.

• Formula: (Accounts Receivable ÷ Total Credit Sales) × Number of Days
• Example: If you have $50,000 in receivables and $150,000 in quarterly credit sales, your DSO is ($50,000 ÷ $150,000) × 90 = 30 days
• Interpretation: On average, you collect payment 30 days after the sale

Days Payable Outstanding (DPO)

DPO measures the average number of days you take to pay your suppliers. A higher DPO means you are holding onto cash longer before paying bills.

• Formula: (Accounts Payable ÷ Cost of Goods Sold) × Number of Days
• Example: If you have $30,000 in payables and $120,000 in quarterly COGS, your DPO is ($30,000 ÷ $120,000) × 90 = 22.5 days
• Interpretation: On average, you pay suppliers about 23 days after receiving an invoice

Why These Metrics Matter

DSO and DPO directly impact your working capital needs:

• High DSO + Low DPO = Cash strain: You pay suppliers faster than you collect from customers, requiring more working capital
• Low DSO + High DPO = Cash efficiency: You collect quickly and pay slowly, reducing working capital needs
• Balanced cycle: The ideal scenario maintains good supplier relationships while collecting promptly from customers

The Cash Conversion Cycle

DSO and DPO are components of your cash conversion cycle (CCC), which measures how long cash is tied up in operations:

CCC = DSO + Days Inventory Outstanding - DPO

A shorter cash conversion cycle means your business is more efficient at converting sales into cash. Negative CCC (rare) means you collect from customers before paying suppliers — effectively using supplier capital.

Improving Your DSO

To collect payments faster:

• Invoice promptly when work is completed or goods are delivered
• Offer early payment discounts (e.g., 2% discount if paid within 10 days)
• Require deposits or progress payments for large projects
• Follow up on overdue invoices systematically
• Consider invoice factoring for immediate cash on receivables

Lender Perspective

Lenders analyze your DSO and DPO to assess working capital efficiency and cash flow health. A high or increasing DSO may signal collection problems, while very high DPO might indicate cash flow stress or potential supplier relationship issues.