Days sales outstanding (DSO) and accounts receivable (AR) turnover are key metrics for assessing a company’s efficiency in managing accounts receivable, each offering distinct insights. 

• DSO measures how long it takes your business to collect payment for a sale.
• AR turnover shows how effectively you collect payments by measuring how many times you clear your outstanding balances within a given period. 

When analyzed together, these measurements help you make strategic decisions about your collection processes. Strong performance—reflected by high turnover and low DSO—indicates efficient receivables management. If your business shows misalignment between these metrics, you can identify specific areas to strengthen your collection practices.

What is DSO?

DSO reveals how quickly you convert credit sales into cash. While optimal DSO varies across industries, a lower number signals stronger cash flow and effective collections. Your DSO also measures the efficiency of your cash application process—how accurately and quickly your organization matches incoming payments to outstanding invoices. This step in the order-to-cash cycle is crucial for maintaining accurate books and optimizing working capital.

What is accounts receivable turnover?

Accounts receivable turnover shows how often you collect outstanding payments within a given period. A higher ratio indicates your customers pay promptly and your collection processes are working effectively. This metric directly impacts your cash flow and can signal whether you need to adjust payment terms, explore AR financing options or strengthen collection practices.

How to calculate DSO

To calculate DSO, follow these steps:

1. Gather three numbers:
   • Your total accounts receivable (what customers owe you) at period end 
   • Your net credit sales for the period, excluding any cash sales
   • Number of days in the period, usually 365 for annual, 90 for quarterly
2. Use this formula: 
   
   DSO = ((Accounts receivable) / (Credit sales)) * Number of days

The lower your DSO, the faster you’re converting sales to cash. For example, a DSO of 45 means it typically takes 45 days to collect payment after a sale.

How to calculate accounts receivable turnover 

To calculate the accounts receivable turnover, follow these steps:

1. Gather your initial numbers:
   • Your net credit sales for the period (excluding cash transactions)
   • Your AR balance from the start of the period
   • Your AR balance from the end of the period
2. Calculate your average accounts receivable for the period:
   • Add the starting AR  balance and ending AR balance
   • Divide by two
3. Apply the formula to get the final ratio: 
   
   Accounts receivable turnover = (Net credit sales) / (Average accounts receivable)

A higher ratio means you’re collecting payments more frequently. For example, a ratio of 8 means you typically collect your average receivables eight times per year, or about every 45 days.

If we apply the steps above to the case of a fashion shop with $80,000 in credit sales for the year and an accounts receivable balance of $8,000 at the beginning of the year and $12,000 at the end, we get accounts receivable turnover ratio of 8. This means the shop collects its average accounts receivable eight times over the course of the year, indicating a high degree of efficiency for its credit and collection processes.