Key takeaways
- DSO tells you how many days of sales are tied up in receivables; the ageing report tells you where the risk is.
- Track both together. A stable DSO can hide a growing block of very old, high-risk debt.
- Collections improve fastest with clear ownership, a weekly review of the largest and oldest balances, and dispute resolution with operations.
- Expected credit loss provisioning should be based on the ageing profile and adjusted for customer-specific information.
Receivables are often the largest current asset on a company’s balance sheet, and one of the most neglected. Sales teams are rewarded for invoicing, not for collecting. Finance reports a total balance and perhaps a DSO figure once a month. Meanwhile, a few customers drift from 30 days to 90 days to “disputed”, and the business discovers the problem only when cash is short or the auditors ask for a provision.
This guide explains how to measure receivables properly with DSO and an ageing analysis, how to read the trends together, and how to build a collections process that actually reduces overdue balances. The example data is illustrative, but the pattern — a modest rise in DSO hiding a sharp rise in old debt — is extremely common.
1. Days sales outstanding (DSO)
DSO estimates the average number of days it takes to collect sales. The simplest formula divides receivables by sales and multiplies by the number of days in the period:
Example: 95 ÷ (64 + 61 + 66) × 91 = 45 days
Use credit sales (exclude cash sales), use the same period length consistently, and be aware that seasonal sales distort the measure: a strong final month inflates receivables and therefore DSO, even if customers are paying on time. The count-back method — subtracting each month’s sales from the receivables balance, working backwards, until the balance is exhausted — handles seasonality better and is worth using if sales swing significantly month to month.
Swipe sideways to see the full chart →
Days sales outstanding, count-back on 3 months’ sales (illustrative)
View the data behind this chart
| Period | DSO (days) |
|---|---|
| Apr | 39 |
| May | 39 |
| Jun | 41 |
| Jul | 43 |
| Aug | 44 |
| Sep | 45 |
2. The ageing analysis
An ageing report groups each customer’s open invoices by how long they are past their due date. It should be produced from the subledger, reconciled to the general ledger every month, and reviewed both in total and by customer.
Swipe sideways to see the full chart →
Receivables by age bucket, April–September (illustrative, BDT million)
View the data behind this chart
| Month | Not yet due | 1–30 days overdue | 31–60 days | 61–90 days | Over 90 days | Total |
|---|---|---|---|---|---|---|
| Apr | 42 | 18 | 9 | 4 | 3 | 76 |
| May | 43 | 17 | 10 | 5 | 4 | 79 |
| Jun | 40 | 19 | 11 | 6 | 5 | 81 |
| Jul | 44 | 18 | 12 | 7 | 6 | 87 |
| Aug | 41 | 20 | 12 | 8 | 8 | 89 |
| Sep | 45 | 19 | 13 | 8 | 10 | 95 |
Reading the two charts together tells the real story. DSO rose by 6 days, which looks manageable. The ageing shows why: the current and 1–30 day buckets are stable, but every older bucket is growing, and the over-90 bucket has gone from 4% to 11% of the total. Old debt is the debt least likely to be collected, so this is where both cash and credit risk sit.
3. Why receivables age
Before chasing customers harder, find out why invoices are not being paid. In most businesses, a large share of “overdue” balances is not caused by customers who cannot pay, but by internal issues that give customers a reason to wait.
| Root cause | Typical sign | Fix |
|---|---|---|
| Pricing or quantity disputes | Short payments, deductions on remittances | Resolve with sales/operations within an agreed time; issue credit notes promptly |
| Missing or incorrect documents | Customer says invoice not received or not matched to PO | Invoice checklist; e-invoicing; PO reference mandatory |
| Quality claims | Payment held pending claim settlement | Track claims separately with owner and deadline |
| Weak credit control at onboarding | New customers overdue quickly | Credit application, limits, security where appropriate |
| No follow-up routine | Balances age without contact | Dunning calendar and weekly review |
| Genuine financial difficulty | Partial payments, broken promises | Stop supply, payment plan, legal escalation, provision |
4. A collections process that works
- Assign ownership. Every customer account has a named collector, and the relationship owner in sales shares responsibility for overdue balances.
- Contact before the due date. A short reminder a few days before the due date for large invoices prevents many “we never received it” delays.
- Follow a dunning ladder. Day 1 overdue: reminder. Day 15: call. Day 30: escalation to the customer’s finance manager. Day 45–60: senior escalation and review of credit terms. Day 90: hold further supply and agree a recovery plan.
- Review weekly. A 30-minute meeting on the top 20 overdue balances, with sales present, does more than any monthly report.
- Log disputes separately with a reason code, owner and target resolution date, so they do not hide inside the ageing.
- Link to incentives. Where possible, base part of sales incentives on collected revenue, not invoiced revenue.
5. Provisioning for expected credit loss
Under IFRS 9, companies recognise a loss allowance for expected credit losses on trade receivables, and most use the simplified approach with a provision matrix based on ageing. The matrix applies a loss rate to each bucket, derived from historical loss experience and adjusted for current conditions and forward-looking information.
| Age bucket | Balance (BDT m) | Illustrative loss rate | Allowance (BDT m) |
|---|---|---|---|
| Not yet due | 45 | 0.5% | 0.23 |
| 1–30 days | 19 | 1.5% | 0.29 |
| 31–60 days | 13 | 5% | 0.65 |
| 61–90 days | 8 | 15% | 1.20 |
| Over 90 days | 10 | 40% | 4.00 |
| Total | 95 | 6.37 |
Loss rates above are illustrative only. Actual rates must be based on the company’s own loss history, adjusted for forward-looking information, and specific provisions should be made for customers known to be in difficulty.
Notice that the over-90 bucket, only about 11% of the balance, drives more than 60% of the allowance. Reducing old debt is therefore the most effective way to reduce both credit risk and provision charges.
6. KPIs to report each month
- DSO (and best possible DSO, which uses only current balances, to separate terms from overdue performance).
- % overdue and % over 90 days of total receivables.
- Collection effectiveness index: collections ÷ (opening receivables + credit sales − closing current receivables).
- Disputed balance and average days to resolve disputes.
- Top 10 overdue customers with action and owner.
These measures fit naturally into a monthly finance dashboard — see my article on finance KPIs for a management dashboard — and the expected collections feed directly into the 13-week cash flow forecast.
Standards referenced in this article
IAS and IFRS are one body of standards — IFRS Accounting Standards, issued by the IASB. Standards issued before 2001 keep their IAS numbers and remain fully in force unless replaced. See the full IFRS & IAS standards list for every number and replacement.
| Standard | Title | Status | IFRS # & IAS # link |
|---|---|---|---|
| IFRS 9 | Financial Instruments | In force (2018) | Replaced most of IAS 39 |
Frequently asked questions
What is a good DSO?
It depends on the payment terms in the industry. A useful benchmark is to compare DSO with the average agreed credit terms: if terms are 45 days and DSO is 60, roughly 15 days of sales are tied up in overdue balances.
What is the difference between DSO and the ageing report?
DSO is a single average measure of how long sales take to collect. The ageing report shows how receivables are distributed by days past due, which reveals concentrations of old, high-risk balances that an average can hide.
How often should receivables be reviewed?
Large and overdue balances should be reviewed weekly with sales and collections staff. The full ageing, DSO and provision should be reviewed monthly as part of the close and reported to management.
Conclusion
Receivables management is not glamorous, but it is one of the fastest ways to release cash and reduce risk. Measure DSO and the ageing profile together, find and fix the root causes of overdue balances, run a weekly collections routine with sales involved, and provision on a disciplined, documented basis. The reward is a stronger cash position and fewer surprises at year-end.
Written by Liakat Hossain
Finance and accounts professional with experience in FP&A, SAP FICO, Power BI, internal control, reporting, audit, tax, VAT and export-oriented business operations.
This article is original educational content based on professional finance practice. Real-project examples are anonymized, and scenario figures are identified as model outputs rather than guaranteed results.