Days sales outstanding (DSO) is a ratio that estimates how many days, on average, a company waits to be paid after it makes a sale on credit. Lower DSO means cash comes in faster.
How it works in factoring
The usual calculation is:
DSO = (accounts receivable / credit sales for the period) x number of days in the period
Illustrative example: A distributor has $300,000 in receivables at quarter end and made $900,000 in credit sales during the 90-day quarter. DSO = (300,000 / 900,000) x 90 = 30 days.
DSO is closely related to AR days outstanding and the collection period; different sources use slightly different inputs, such as total sales versus credit sales, or ending versus average receivables.
Factors use DSO in several ways:
- To estimate how long advances will be outstanding, which drives time-based fees
- To compare actual collection speed with the stated credit terms
- To spot deterioration, such as DSO rising while sales are flat
Factoring itself can change what DSO means for the seller. Once invoices are sold, the business gets cash early even though the customer still takes the same time to pay the factor.
What to check
- Track DSO monthly and by major customer
- Compare it with your net terms; a large gap suggests collection problems or disputes
- Remember that seasonal sales swings can distort a single period's figure
DSO is a simple signal, but paired with an aging report it gives a clear view of receivable health.