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As business owners, most of you must have gone through clients who take forever to pay. You shipped the product, sent the invoice, maybe even followed up more than once… and still, the money’s not in your account. This is the frustrating world of delayed payments where small and mid-sized businesses are stuck especially. And it’s a serious roadblock for them.
Late payments have the ability to create cash flow problems big time. They can ruin your budget, and sometimes even force you to borrow money just to cover everyday expenses. And trust me, you’re not alone. Over the past year, late payments and unpaid invoices have become a growing headache for U.S. businesses trading on credit. In 2023, more than half, around 55%, of all B2B invoices were past due and the trend continues upward. Even more alarming? Roughly 9% of all credit-based sales end up as write-offs.
But if you have shown the slightest interest in fixing this, you must have tried to spot these cash flow drags. And you must have tried to know that how long does it take for your customers to pay you. And there you’re talking about a good DSO(Days Sales Outstanding) target.
What’s the formula for DSO?
Here’s the simple formula for DSO:
DSO = (Accounts Receivable (AR) ÷ Total Credit Sales) × Number of Days
Let’s understand in detail:
- AR: Accounts receivable is the total amount of money your customers owe you at a given time.
- Total Credit Sales: The total value of sales made on credit (not cash) during a specific period.
- Number of Days: Usually the number of days in the period you’re analyzing. Can be 30 for a month, or 90 for a quarter.
Yay! If your DSO is low, it means you’re getting paid quickly. But if it’s high, your money is stuck somewhere between “sent invoice” and “paid.”
This metric matters because it’s a window into your cash flow health. The longer it takes for you to get paid, the harder it gets to fund operations, pay employees, or grow the business.
Why DSO matters
DSO is a simple way to track if your customers are paying you too slowly.
It’s directly tied to your cash flow health
High DSO means slow cash inflow. If your customers are taking 45, 60, or even 90 days to pay, your cash is stuck, while your bills payable (payroll, rent, suppliers) won’t wait. Either you’ll pay late or take loans to run these operations.
It messes with your working capital
Working capital is your “day-to-day operating fuel.” And when DSO is too high, your available cash shrinks, which means you may have to cut back on marketing, inventory, or hiring just to survive the slow cash cycle. You’ll also have to step back from your goals of scaling your business.
It reflects the strength of your collections process
A rising DSO is often a red flag. Maybe invoices aren’t going out on time. Maybe follow-ups are weak. Maybe you’re offering payment terms that are way too generous. DSO helps you catch these early before things spiral.
It can influence your credit rating and funding
Yes, banks and investors watch DSO too. If they see that you’re slow to collect money, they might see you as a higher risk. This can affect loan approvals, interest rates, and even investor confidence.
58% of SMBs said late payments directly impacted their ability to pay their own vendors on time. It’s a ripple effect, and DSO helps you spot it before it crashes into your bottom line.
Bottom line? DSO is a warning light on your financial dashboard.
What’s a good DSO target?
So, what’s considered a good DSO target you ask? A healthy DSO target is usually between 30 to 45 days for most businesses in the U.S. But this really depends on your industry and how your sales cycle works.
For example:
- In retail or e-commerce, DSO is usually low, often under 30 days, since payments are made upfront or quickly.
- In manufacturing or wholesale, 45 to 60 days is more normal because of longer delivery and payment terms.
- In professional services, it’s not unusual for DSO to go above 60 days since projects are long and clients may have extended payment timelines.
The key is to compare your DSO to others in your own industry. If your DSO is above average, then there’s a problem to fix.
But here’s something to keep in mind:
Low DSO is definitely a win but a super low DSO is not. If your DSO is, say, 5 or 10 days, it might mean your credit terms are too strict. That could turn away potential customers who need some payment flexibility.
In the end, a good DSO target is one that keeps your cash coming in smoothly without hurting your sales. It’s about finding the right balance between giving customers enough time to pay, and making sure you’re not waiting forever.
When to worry: High DSO red flags
A high DSO every now and then isn’t always a big problem. Sometimes it’s just one slow-paying client or a delay in sending overdue invoices because of which the average result suffers. But your DSO is increasing each month you need to look into it. It could point to weak collection efforts, delayed follow-ups, or customers who are stretching payment terms more than they should.
Another big red flag is when your DSO is way higher than your agreed payment terms. For example, if your terms are net-30 but your DSO is sitting around 55, that’s a clear sign your customers are paying late, and that delay is tying up your cash. It’s also worth checking your AR aging report. If a large chunk of your receivables are sitting in the 60 or 90+ day buckets, that’s a warning that invoices are being ignored or forgotten.
Also, if you’re booking revenue but not collecting the cash, you’ve got a mismatch that can hurt your ability to pay vendors, invest in growth, or even make payroll. When these signs show up together, it’s time to revisit your credit policy and collection process before it starts affecting the rest of your business.
Keep your cash moving, not stuck
If your DSO is in a good range, that usually means your cash flow is steady, your customers are paying on time, and your team is managing receivables well.
And the best part is that it’s a number you can actually influence with clear credit terms, better follow-ups, and tighter invoicing processes. So, if it isn’t good, you can fix it.
Tracking DSO is easy. Lowering it? That’s where Forwardly comes in.
With AI-powered bill capture, seamless approval workflows, and real-time payment, Forwardly helps you shrink DSO from weeks to days, without the manual grind. Start using Forwardly and turn “days outstanding” into “cash collected.”
