Days Sales Outstanding (DSO)
How many days, on average, it takes a company to collect payment after making a sale. A rising number means customers are paying more slowly.
How to calculate it
Receivables turnover = revenue ÷ average accounts receivableDSO = 365 ÷ receivables turnover = average accounts receivable ÷ revenue × 365How to read it
- Focus on the change. A clear increase from the same period last year may mean looser credit terms used to push sales, or customers that are struggling to pay.
- Receivables growing faster than revenue over several periods is one of the most common signs of declining earnings quality.
- Check the allowance for credit losses. A rising DSO with a flat allowance means the company is assuming those receivables will still be collected.
Common pitfalls
- Seasonal businesses show very different DSO by quarter. Compare with the same quarter last year, not the previous quarter.
- Selling receivables (factoring) or classifying amounts as contract assets or unbilled receivables can make DSO look stable while collections are not improving. Under ASC 606, unbilled amounts often sit in contract assets.
- Companies paid in advance (subscriptions billed upfront, prepaid services) carry little receivables, so DSO is not very informative for them; deferred revenue is the more useful line.
Industry differences
Companies selling to governments and large enterprises (defense, engineering, medical equipment) naturally collect slowly; consumer retailers collect almost immediately. Compare with peers or with the company's own history.
Where to find it in a 10-K
Balance sheet 'Accounts receivable, net' and income statement revenue. The revenue recognition note shows contract assets and deferred revenue; the credit-loss disclosures show the allowance.
U.S. vs. China reporting
A-share companies often carry notes receivable (bank and commercial acceptance bills) alongside accounts receivable, and must be included to get a true picture. U.S. companies rarely use such bills. Chinese suppliers to state-owned customers also tend to have much longer collection cycles than U.S. peers.