Cash-Flow Fundamentals
DSO Explained: Days Sales Outstanding for Small Service Businesses
Short answer
DSO (Days Sales Outstanding) = (Accounts Receivable ÷ Total Credit Sales) × Number of Days. A service business with mostly residential customers should target under 15 days. Commercial work often runs 30–45. Above 60 is a warning sign.
DSO is the single best metric for how healthy your collections are. Track it monthly and you will see slippage before it becomes a cash crisis.
How to calculate
- Add up your current accounts receivable (everything not yet paid).
- Add up your credit-based sales (invoices, not cash) over a measurement period — typically last 90 days.
- Divide AR by credit sales, then multiply by 90.
- Example: $30,000 AR ÷ $90,000 credit sales × 90 = 30 DSO.
Benchmarks by trade
| Customer type | Healthy DSO |
|---|---|
| Residential, pay-on-completion | 0–7 days |
| Residential, net-15 terms | 10–18 days |
| Commercial, net-30 terms | 30–40 days |
| General contractor / subbing | 45–60 days |
| Government / municipal | 45–90 days |
Three ways to lower DSO
- Invoice the day the job ends — not Friday, not month-end. Every day of delay is a day added to DSO.
- Offer online payment (card, ACH, Apple/Google Pay). Customers pay faster when it takes 30 seconds.
- Send automated reminders at day 3, day 7, day 14, day 21.
Frequently asked questions
What if I only get paid in cash on completion?
Your DSO is effectively 0 — congratulations. The metric matters for businesses that extend terms.
Cash flow you can see.
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Sources & further reading
Primary sources we consulted when writing and reviewing this guide.