If your invoices average 45 days to get paid and you reduce that to 35, how much extra cash lands in your bank? This guide shows you the maths in plain English, and seven fixes you can apply this quarter.

Who this is for (and not for): service-based UK SMEs (typically 5–30+ staff) who invoice on credit terms. If you’re cash-on-delivery only, DSO won’t be the right metric (look to your month-end reporting timetable and cash-in/cash-out rhythm instead).

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What DSO actually means (and why you should care)

DSO (Days Sales Outstanding) is the average number of days it takes you to collect cash from credit sales after you issue an invoice. A standard formula is:

DSO = (Average trade receivables ÷ net credit sales) × number of days.

For service SMEs, DSO matters because it touches payroll, VAT quarters, supplier leverage, and your ability to invest in growth. If you track the CCC (Cash Conversion Cycle), DSO is one of its three legs (CCC = DIO + DSO − DPO). Investopedia

Related reading: see Pillar D: Core formulas for the full set (gross margin £, EBIT, daily sales, CCC, working capital).

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Two ways to calculate DSO (choose and stick with one)

Simple method (quick)

• Formula: Average AR ÷ net credit sales × days.
• Good for: fast monitoring when sales are fairly even.
• Watch-out: can be distorted by seasonality or big one-offs. Corporate Finance Institute

Countback method (seasonality-friendly)

• Idea: “Roll back” month by month, matching debtors to the most recent months’ sales until you’ve “covered” the receivables balance.
• Good for: agencies/consultancies with uneven billings or milestone invoices.
• Trade-off: more effort to compute (worth it if sales are lumpy).

Heights Tip: For trend analysis, consistency beats perfection. Pick one method, document it in your finance SOP*, and use it every month.

*A finance SOP is a step-by-step playbook that standardises finance tasks (invoicing, month-end close, payroll, approvals) so work is consistent, compliant, and on time.

Also useful: our Month-End Reporting Timetable guide shows where DSO sits in a seven-working-day close and board pack.

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Turn “days” into pounds: the fast cash formula

Define Daily Sales as annual (or period) net credit sales ÷ 365. Rearranging gives two handy rules of thumb:

• AR (£) ≈ DSO × Daily Sales
• Cash freed (£) from a DSO improvement
  = (Old DSO − New DSO) × Daily Sales
  = (Old DSO − New DSO) × (Annual net credit sales ÷ 365)

This is the engine room for your cash-improvement plan.

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Step-by-step: calculate your DSO correctly (UK nuances)

1. Choose your period. Use the last 12 months if you want to smooth seasonality; average opening/closing AR for the period.
2. Use net figures consistently. Analysts typically use net revenue/credit sales in the denominator (exclude returns/discounts, and we prefer excluding VAT to align with your P&L). Match the numerator accordingly. The key is consistency period-to-period. Wall Street Prep
3. Separate unusual items. Put disputed invoices, long-term retentions, and intercompany receivables in their own buckets so they don’t mask BAU collections.
4. Document your method. Add it to your Core formulas playbook so the team calculates it the same way every month.

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“What’s a good DSO?”

Anchor it to your contract terms and client mix. If your standard terms are 30 days, a DSO persistently >45 is a red flag; <30 usually signals strong invoicing discipline and credit control. There isn’t one “right” number across all service firms, watch your trend and the gap to your stated terms.

Related reading: EBIT vs EBITDA vs Operating Profit (why clean, timely revenue recognition + collections improve lender confidence).

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Why DSO creeps up: common root causes

• Invoices go out late (or missing POs/approvals).
• Scopes/SOWs are fuzzy → avoidable disputes.
• Client approval chains are long and unclear.
• Weak onboarding: no credit checks, limits or deposits.
• Only one way to pay; no Direct Debit/card link.
• No chasing rhythm: reminders start after due date, not before.
• No escalation path; work continues when accounts are overdue.

Related reading: Accounts Receivable / Credit Control guide (set terms, deposits, and chasing rhythm that actually gets you paid).

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Seven fixes to reduce DSO (without upsetting clients)

1. Terms + deposits: Move projects to 25–50% up-front; shorten terms on new engagements.
2. Invoice the same day: Trigger invoices from milestones; no “Friday batch.”
3. Make it easy to pay: Offer Direct Debit and card links on every invoice.
4. Chasing rhythm: Pre-due reminder (T-3), due-day nudge, +3, +7, +14, then senior contact.
5. Credit checks & limits: Onboard well; review annually.
6. Get the data right: PO numbers, named approver, line detail to avoid disputes.
7. Enforce late fees lawfully: If your contract is silent, UK law allows statutory interest at 8% + the Bank of England base rate and fixed-sum compensation on late B2B invoices; the Small Business Commissioner provides a calculator. GOV.UK

Objection: “We’ll annoy clients if we chase before the due date.”
Handled well, pre-due reminders are polite, short, and helpful (“Here’s your PO and link to pay if you want to clear it now”). Friction usually comes from surprise (missing PO), ambiguity (wrong contact), or frustration (no easy way to pay), all fixable with the steps above.

Policy watch (for firms selling to large buyers): From 1 October 2025, suppliers bidding for major government contracts must show an average 45-day payment time (95% within 60 days). Expect stronger expectations on payment speed across supply chains. GOV.UK

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Worked example: 45 → 35 days (what drops into your bank?)

Your numbers (example):

• Annual net credit sales: £2,000,000
• Current DSO: 45 days → Target DSO: 35 days
• Daily Sales = £2,000,000 ÷ 365 = £5,479.45
• Cash freed = (45 − 35) × £5,479.45 = £54,795 (rounded)

That’s over £54k back in your account, without selling anything extra.

10-day DSO reduction cheat-sheet (net credit sales):

Annual credit sales	Cash freed from 10-day DSO reduction
£1,000,000	£27,397
£2,000,000	£54,795
£3,000,000	£82,192
£5,000,000	£136,986

Now plug in your revenue below and see the impact instantly.

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Mini-calculator

Tip: Use net figures (exclude VAT) on both receivables and sales for consistency with your P&L.