Accounts Receivable & DSO Calculator

Frequently Asked Questions

What is DSO and how do you calculate it?

DSO stands for days sales outstanding — the average number of days it takes to collect payment after invoicing. Divide your accounts receivable balance by revenue for the period, then multiply by the number of days in that period. A contractor with $180,000 in receivables against $1.2 million of annual revenue has a DSO of about 55 days, meaning roughly two months of completed work is sitting unpaid at any moment.

What is a good DSO for a contractor?

It depends almost entirely on who pays you. Residential service businesses collecting at the time of service can run a DSO in the single digits. Contractors invoicing homeowners on net-30 terms typically land somewhere in the 30s. Commercial and new-construction work running through a general contractor commonly sits at 60 to 90 days or more, before retainage. The meaningful comparison is against your own stated terms — if you invoice net-30 and your DSO is 62, collections is the problem, not the terms.

How much does slow collection actually cost?

Two ways. If you borrow to cover the gap, the cost is the interest on the financing you would not otherwise need — receivables of $180,000 carried on a line at 10% costs about $18,000 a year. If you do not borrow, the cost is opportunity: cash locked in receivables cannot buy inventory, fund a van, or make payroll during a slow month. The second cost is harder to see and is usually the reason a profitable contractor still feels broke.

How much cash does cutting DSO free up?

Each day of DSO represents roughly one day of revenue tied up. Take annual revenue, divide by 365 to get revenue per day, and multiply by the number of days you cut. A business doing $1.2 million a year frees about $3,300 for every single day it shaves off DSO — so moving from 55 days to 40 releases roughly $49,000 of cash permanently, without selling anything more.

What is the fastest way to reduce DSO?

Invoice sooner. In most service businesses the largest single delay is not the customer paying late — it is the days between finishing the work and sending the invoice, which is entirely within your control. After that: collect at the point of service where the job type allows it, offer card and financing options so payment does not depend on a cheque being written, and make one follow-up call at day seven rather than a series of emails at day forty-five.

Should I offer a discount for early payment?

Run the arithmetic before you do. A 2% discount for paying 20 days early is equivalent to an annualised cost well above 30% — far more expensive than almost any line of credit. Early-payment discounts make sense when you cannot borrow at all, or when the alternative is a receivable you may never collect. If you simply want the money sooner and have access to credit, financing the gap is usually cheaper than discounting the invoice.

How does retainage affect receivables?

It inflates DSO in a way that is easy to misread. Retainage is withheld by contract and is not late in the ordinary sense, but it sits in receivables and drags the average out, sometimes for months past completion. Track retainage separately from ordinary receivables so you can see whether a high DSO reflects a collections problem you can fix or contractual holdback you agreed to — the two need completely different responses.

When should a receivable be written off?

There is no single rule, but collectability drops sharply with age, and receivables past about 90 days are materially harder to collect than recent ones. The practical trigger is when the expected recovery no longer justifies the time and cost of chasing it, including any legal or lien filing expense. Speak to your accountant about timing and treatment, because writing off a bad debt has tax consequences and the rules depend on your accounting method.