Key Insight
DSO is the velocity of cash collection. A business that can't collect quickly has tied up working capital in receivables — funding its customers' operations instead of its own.
The Formula
DSO = (Accounts Receivable ÷ Total Revenue) × Number of Days in Period
For a business with $180,000 in AR and $1.2M in annual revenue: DSO = ($180,000 ÷ $1,200,000) × 365 = 54.75 days
This means the business waits an average of 55 days from invoice to collection.
Why DSO Matters for Acquisitions
Working capital requirements: High DSO businesses require more working capital — more cash is tied up in receivables at any point. A business with 45-day DSO needs more working capital than one with 15-day DSO at the same revenue level.
Cash flow reality: A profitable business with very high DSO may have persistent cash flow stress — always waiting to collect what's already been earned.
Credit risk signal: Rising DSO over time suggests customers are paying more slowly — which could indicate their financial distress, billing disputes, or weakening customer relationships.
Industry Benchmarks
DSO varies significantly by industry:
- Retail and consumer services: 0-10 days (cash or credit card)
- Professional services: 30-60 days
- Government contracting: 45-90 days
- Healthcare/insurance reimbursement: 30-75 days
- Construction: 60-90 days
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