Best Possible DSO Explained

A rising DSO tells an AR Manager that something changed. But it does not necessarily tell them what changed.

Did customers start paying later? Did sales increase? Did payment terms change? Is a larger portion of accounts receivable now past due?

Days Sales Outstanding (DSO) is useful for understanding the receivables position, but DSO alone does not tell the complete story.

Best Possible DSO adds another perspective by looking at current receivables rather than the full ending accounts receivable balance.

If you are new to accounts receivable, some of these terms may sound complicated. They are easier to understand once we break down the inputs first.

Before calculating DSO, understand the inputs

Let's start with the basic terms used in DSO and Best possible DSO.

What is Accounts Receivable?

Accounts Receivable (AR) is money customers owe your company for invoices you have issued but have not yet been paid.

For example, suppose your company provides a customer with $20,000 of services and sends an invoice.

Until the customer pays that invoice, the $20,000 is part of your accounts receivable.

If all unpaid customer invoices together equal $800,000, the company has:

Accounts Receivable = $800,000

What is Ending Accounts Receivable?

Ending Accounts Receivable is the total accounts receivable balance at the end of the period you are measuring.

Suppose you are reviewing January through March.

On March 31, your company has $800,000 in unpaid customer invoices.

Your ending accounts receivable is:

Ending Accounts Receivable = $800,000

This balance can contain invoices that are still within their payment terms as well as invoices that are already past due.

What are Current Receivables?

Current Receivables are receivables that have not yet become past due.

Suppose the company has $800,000 in total accounts receivable.

Of that:

Current Receivables = $300,000

Past-Due Receivables = $500,000

The $300,000 represents invoices that are still within their payment terms.

For example, suppose an invoice has Net 30 payment terms and is due on March 30.

If you review the invoice on March 20 and it has not been paid, it can still be considered current because the due date has not yet passed.

If the invoice remains unpaid after its due date, it becomes past due.

This distinction between current and past due is important for understanding Best possible DSO.

What are Credit Sales?

Credit Sales are sales where the customer receives the product or service now and is allowed to pay later.

For example, your company provides $50,000 of services and sends the customer an invoice with Net 30 payment terms.

The customer does not need to pay immediately. They are expected to pay according to the agreed terms.

That $50,000 is a credit sale.

If the company generated $1.6 million in credit sales during the reporting period:

Credit Sales = $1,600,000

This matters because the DSO and Best possible DSO formulas used in this article use credit sales rather than all revenue.

What does Number of Days mean?

Number of Days is simply the number of calendar days in the reporting period you are measuring.

For example:

A 30-day month:

Number of Days = 30

A 90-day quarter:

Number of Days = 90

A full year:

Number of Days = 365

If you are calculating DSO for a 90-day period, you use:

Number of Days = 90

The receivables balance, credit sales, and number of days should relate to the same reporting period.

What does Net 30 mean?

You will frequently see payment terms such as:

Net 15

Net 30

Net 45

Net 60

These terms describe when payment is expected according to the agreed payment terms.

For example, an invoice with Net 30 terms is generally expected to be paid within 30 days, subject to the contract and the organization's date-calculation rules.

Payment terms are important because an unpaid invoice is not necessarily late.

An invoice can remain unpaid while still being current if its due date has not yet arrived.

Let's use one example throughout

Now let's put those definitions together.

Assume an AR Manager is reviewing a 90-day quarter.

At the end of the quarter:

Ending Accounts Receivable = $800,000

Of that:

Current Receivables = $300,000

Past-Due Receivables = $500,000

During the same period:

Credit Sales = $1,600,000

And:

Number of Days = 90

Now we have everything needed to calculate DSO and Best possible DSO.

What is DSO?

Days Sales Outstanding (DSO) is a days-based measure used to express accounts receivable relative to credit sales.

Using the period-based calculation in this article:

DSO = Ending Accounts Receivable × Number of Days ÷ Credit Sales

Using our example:

DSO = $800,000 × 90 ÷ $1,600,000

DSO = 45 days

What does that mean?

Under this calculation, the company's ending accounts receivable represents approximately 45 days of credit sales.

But there is something DSO does not tell us directly.

Of the $800,000 sitting in accounts receivable, how much is still current and how much is already past due?

That is where Best possible DSO adds another perspective.

What is Best Possible DSO?

Best Possible DSO is also a days-based AR metric.

The key difference is that Best possible DSO uses current receivables instead of the full ending accounts receivable balance.

The formula is:

Best possible DSO = Current Receivables × Number of Days ÷ Credit Sales

Using our example:

Best possible DSO = $300,000 × 90 ÷ $1,600,000

Best possible DSO = 16.9 days

Now compare the two:

DSO = 45 days

Best possible DSO = 16.9 days

Why are the results different?

Because DSO used the entire $800,000 ending accounts receivable balance.

Best possible DSO used only the $300,000 current receivables balance.

That difference is the main reason Best possible DSO can add useful context when reviewing DSO.

DSO vs. Best possible DSO

Here is the difference in simple terms:

DSO gives a broader view based on the ending receivables balance.

Best possible DSO gives a view based on current receivables.

The difference between the two can then be expressed using another metric: Average Days Delinquent (ADD).

What is Average Days Delinquent?

Average Days Delinquent, or ADD, is calculated as:

ADD = DSO − Best possible DSO

Using our example:

ADD = 45 − 16.9

ADD = 28.1 days

So now our AR Manager has three related numbers:

DSO = 45 days

Best possible DSO = 16.9 days

ADD = 28.1 days

The important part is not memorizing three formulas. It is understanding what each number helps you examine. DSO provides the broader receivables view.

Best possible DSO provides a view based on current receivables. ADD expresses the difference between DSO and Best possible DSO when the calculations use aligned assumptions.

What does the gap between DSO and Best possible DSO tell you?

This is where the metric becomes more useful operationally.

Suppose DSO increases while Best possible DSO remains relatively stable.

The next question should not automatically be:

"Why isn't the collections team collecting faster?"

Instead, the AR Manager can investigate what is happening within the receivables balance.

For example:

• Did more invoices become past due?
• Are a few large overdue invoices driving the change?
• Are customers disputing invoices?
• Have customers missed promised payment dates?
• Has remittance advice arrived but not been processed?
• Have payments been received but not applied?
• Are customer questions waiting for an internal response?
• Did payment terms change?

Best possible DSO does not answer these questions.

It helps provide another signal that tells the AR team where further investigation may be needed.

Why calculation consistency matters

There is one important detail to understand before comparing these metrics.

DSO can be calculated using different methodologies.

This article uses a period-based calculation:

DSO = Ending Accounts Receivable × Number of Days ÷ Credit Sales

Other methodologies may use average accounts receivable and annualize the result.

Neither should be silently mixed with the other.

When comparing DSO, Best possible DSO, and ADD, keep the underlying assumptions aligned:

1. Use the same reporting period.
2. Use the same number of days.
3. Use a consistent credit-sales basis.
4. Use the same calculation convention.
5. Apply the same receivables and aging definitions consistently.

For example, calculating DSO using one methodology and Best possible DSO using another and then subtracting the two would not provide a methodologically consistent ADD.

Consistency is particularly important when comparing results from month to month or quarter to quarter.

Where CEI fits

Best possible DSO is not the only metric that can add context to DSO.

Collection Effectiveness Index (CEI) provides another perspective.

The important difference is that DSO, Best possible DSO, and ADD are expressed in days, while CEI is expressed as a percentage.

They help answer different questions.

DSO: What does the ending receivables position look like in days?

Best possible DSO: What does the current-receivables portion look like in days?

ADD: What is the difference between DSO and Best possible DSO?

CEI: How effectively were available receivables collected during the period?

These measures are better viewed as complementary rather than as replacements for one another.

How can an AR Manager use Best possible DSO?

Best possible DSO becomes more useful when it is reviewed over time rather than treated as another isolated KPI.

Imagine your DSO increased this quarter.

Start by asking what happened to Best possible DSO and ADD.

If DSO and Best possible DSO both increased

Investigate whether current receivables increased because of changes in sales volume, invoice timing, payment terms, or the customer mix.

If DSO increased while Best possible DSO stayed relatively stable

Look more closely at the past-due portion of receivables.

Which customers and invoices are contributing to it?

If ADD increased

Investigate what is contributing to the growing difference between DSO and Best possible DSO.

Then move from the metric to the underlying accounts and invoices.

That investigation may require looking at:

• Aging
• Payment terms
• Customer payment history
• Open disputes
• Promises to pay
• Remittance advice
• Unapplied payments
• Customer communications
• Internal exceptions
• Ownership of the next action

This is an important distinction.

A metric can tell you where to look. It does not automatically tell you what action to take.

Don't turn Best possible DSO into another isolated score

It can be tempting to turn every finance metric into a target:

"Our Best possible DSO needs to be X."

But Best possible DSO is more useful when it helps the AR team understand what is happening within the receivables position.

Review it alongside:

1. Aging: How much AR is current versus past due?
2. Payment terms: Have contractual terms or the customer mix changed?
3. Sales patterns: Did credit sales change materially during the period?
4. Disputes and exceptions: Are operational issues preventing payment?
5. Customer commitments: Are there active promises to pay or payment plans?
6. Cash application: Have payments arrived but not yet been applied?
7. Trend: Is the change temporary, or has it continued across several periods?

The goal is not simply to calculate another number.

The goal is to understand:

What changed?

Why did it change?

Which customers or invoices need attention?

What should happen next?

The practical takeaway

Best Possible DSO is a companion measure to DSO, not a replacement for it.

Using the period-based calculation in this article:

DSO provides a broader view based on ending accounts receivable.

Best possible DSO provides a view based on current receivables.

ADD expresses the difference between the two when the underlying calculations are aligned.

CEI adds another dimension by looking at collection effectiveness as a percentage.

Together with aging and operational collections context, these metrics can help an AR Manager move beyond simply asking:

What is our DSO?

toward more useful questions:

What changed?

Where should we investigate?

What needs attention next?

The metrics help identify where to look.

The collections process determines the appropriate next action.

Sources

National Association of Credit Management, Quick Formulas

National Association of Credit Management, DSO White Paper

Association for Financial Professionals, Days Sales Outstanding (DSO)

Learn about Collections Effectiveness Index Metrics