Accounts receivable turnover – Days Sales Outstanding (DSO) – is one of the most important cash flow metrics. It shows concretely how many days a company's money is 'stuck' in customers' unpaid invoices. The longer the turnover time, the more working capital is needed to run daily operations. In this article, we examine DSO by industry, learn how to calculate it correctly, and identify ways to reduce turnover time.
How Is Accounts Receivable Turnover Calculated?
Calculating accounts receivable turnover is straightforward. The basic formula is: DSO = (Accounts Receivable / Revenue) x Days in the Period. In practice, this means: if a company has €200,000 in accounts receivable and annual revenue of €2,400,000, DSO is (200,000 / 2,400,000) x 365 = 30.4 days.
DSO calculation formula: DSO = (Accounts Receivable / Revenue) x Number of Days Example: Accounts receivable: €200,000 Revenue (12 months): €2,400,000 DSO = (200,000 / 2,400,000) x 365 = 30.4 days This means customers pay their invoices in an average of 30 days.
In addition to DSO, it is worth monitoring accounts receivable turnover ratio, which shows how many times per year accounts receivable turn over. Turnover ratio = Revenue / Accounts Receivable. In the example above, the turnover ratio would be 12, meaning accounts receivable turn over 12 times per year. The higher the number, the more efficiently cash circulates.
Accounts Receivable Turnover by Industry in Finland
Turnover time varies significantly across industries. The differences are driven by industry-specific practices, bargaining power, and the project-based nature of the work. The following figures are based on Finnish market data and are indicative for SMEs.
Typical DSO figures by industry in Finland:
- Construction: 60–90 days – long project-specific payment schedules and large invoices significantly slow turnover
- IT consulting and software development: 45–60 days – project-based invoicing and large corporations' long payment terms increase DSO
- Industrial subcontracting: 40–55 days – established supplier relationships and contract-based payment terms
- Transport and logistics: 35–50 days – waybill-based invoices and payment terms dictated by large clients
- Wholesale: 30–45 days – volume-based invoicing and regular customers
- Retail (B2B): 25–35 days – shorter payment terms and smaller individual invoices
- Professional services (legal, accounting): 30–50 days – hourly or project-based invoicing
The Impact of DSO on Working Capital – A Concrete Example
The impact of DSO on working capital requirements is dramatic. Let us compare two IT consulting firms of the same size, both with annual revenue of 1.2 million euros.
Company A: DSO 60 days Accounts receivable: (1,200,000 / 365) x 60 = €197,260 Company B: DSO 35 days Accounts receivable: (1,200,000 / 365) x 35 = €115,068 Difference: €82,192 in working capital Company B has over €82,000 more cash on hand – simply because it manages its accounts receivable more efficiently. This money can be used for salaries, investments, or growth.
Why DSO Increases – Typical Causes
Factors behind rising DSO:
- Customer base shifts: moving towards large enterprise clients that dictate long payment terms
- Invoicing delays: invoices are not sent immediately upon work completion but with a one- or two-week lag
- Missing payment reminders: overdue invoices are not followed up systematically
- Disputed invoices: incorrect or unclear invoices slow down payment
- Seasonal variation: customers pay more slowly during certain months
- Economic cycle: during a recession, payment times lengthen across the board
Methods for Reducing Accounts Receivable Turnover Time
Reducing DSO is one of the most effective ways to improve cash flow. Every day you shorten the turnover time frees up working capital. The following methods are listed from the quickest to the most long-term.
10 methods for reducing DSO:
- Invoice financing: converts accounts receivable to cash within 24 hours and reduces the effective DSO to near zero for financed invoices
- Automatic invoicing: invoices are sent immediately upon work completion without manual delay
- Electronic invoicing: e-invoices arrive in the customer's system in seconds; paper invoices take days
- Cash discounts: offer, for example, a 2% discount if the invoice is paid within 10 days – many large companies take advantage of this
- Automatic payment reminders: send a reminder immediately after the due date, do not wait weeks
- Shorter contractual payment terms: negotiate 14-day payment terms instead of 30 days for new contracts
- Advance invoicing: require an advance payment for large projects or new customers
- Credit checks: check new customers' credit ratings before granting long payment terms
- Progress billing: invoice long projects in instalments rather than with a single invoice at the end
- Proactive communication: call customers with the largest invoices before the due date to confirm there are no issues
The Role of Invoice Financing in DSO Management
Invoice financing is the only method that allows a company to effectively eliminate the impact of DSO on cash flow. Even though the customer continues to pay on a 60-day term, the company receives its funds within 24 hours. The effective DSO for financed invoices drops to 1 day, and working capital requirements decrease accordingly.
Particularly in industries where DSO is structurally long – construction, IT consulting, industrial subcontracting – invoice financing is a strategic tool. It enables offering long payment terms to large customers without burdening the company's cash flow. This is a significant competitive advantage, as it allows more flexible payment terms and larger orders.
Monitoring DSO and Setting Target Levels
DSO should be monitored monthly and compared to both your own historical data and the industry average. When setting target levels, realism is important: if the industry average is 55 days and your DSO is 70 days, the first target could be the industry average. If DSO is already at the industry level, you can aim for the top quartile.
The most important thing is that the trend in DSO is heading in the right direction. A rising trend is a warning sign that requires immediate action. A falling or stable trend indicates that cash flow management is in order. Also remember that DSO is an average – turnover time differences between individual customers can be large. Segment DSO by customer or customer group to identify where the biggest problems and opportunities lie.
