When it comes to managing accounts receivable (AR) and improving cash flow, few metrics are as closely tracked as Days Sales Outstanding (DSO) esp – Best Possible DSO vs Standard DSO.
But there’s a growing realization among CFOs and finance teams that Standard DSO alone doesn’t tell the full story. That’s where Best Possible DSO comes in — a metric that helps measure not just how long customers actually take to pay, but how quickly they should pay if everything ran perfectly.
Let’s unpack the difference between the two, their calculations, and how understanding both can transform your receivables strategy.
Table of Contents
What Is Standard DSO?
Standard DSO (Days Sales Outstanding) measures the average number of days it takes your company to collect payment from customers after a sale.
It reflects your real-world collections performance — combining invoices that are current, overdue, and sometimes even disputed.
Standard DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days in Period
Example:
If your accounts receivable is $600,000, total monthly credit sales are $1,200,000, and the month has 30 days: Standard DSO= 15 days
Best Possible DSO
Best Possible DSO measures the minimum number of days it would take to collect payments if all customers paid strictly within their credit terms — in other words, if everyone paid on time.
It’s a benchmark metric that shows how fast cash could ideally flow into your business in a perfect scenario.
Best Possible DSO = (Current Receivables Due Within Terms ÷ Total Credit Sales) × Number of Days in Period
You can also check out FinFloh blog on ‘What is Best Possible DSO‘
Best Possible DSO vs Standard DSO
While both metrics help measure receivable efficiency, they serve different purposes and reveal different insights. Here’s how they compare:
- Nature of Measurement:
- Standard DSO reflects what’s actually happening — the real-time efficiency (or inefficiency) of your collections.
- Best Possible DSO shows what’s theoretically possible if every invoice was paid within terms.
- Formula Inputs:
- Standard DSO uses total accounts receivable (including overdue invoices).
- Best Possible DSO uses only receivables still within payment terms.
- Purpose:
- Standard DSO helps you monitor day-to-day AR performance.
- Best Possible DSO serves as a target benchmark to measure potential improvement.
- Interpretation:
- The gap between Standard DSO and Best Possible DSO represents your collection efficiency gap — how much of your DSO is caused by late payments, disputes, or process delays.
- A smaller gap means your collections are disciplined; a wider gap means there’s room to optimize.
- Example Insight:
If your Best Possible DSO is 10 days but your Standard DSO is 18 days, that 8-day difference shows delayed collections that can be improved through better credit controls or automation.
How to Improve Best Possible DSO
Improving your Best Possible DSO requires strengthening credit policies, reducing friction in collections, and leveraging automation. Here’s how:
Credit Risk Scoring for Every New Customer
Evaluate new customers’ financial health and payment history before extending credit to minimize future delays.
Periodic Credit Risk Review for Existing Customers
Monitor the ongoing payment behavior of your customer base — risk profiles change, and so should credit limits.
Clear and Timely Communication
Send invoices immediately after delivery and follow up proactively before due dates to prevent disputes.
Best Possible DSO Excess Alerts
Set alerts when your actual DSO exceeds your best possible threshold — it’s an early warning signal for potential issues.
Use Automation
Automate invoicing, reminders, reconciliation, and aging reports. AR automation tools help you track due dates and follow-ups seamlessly.
Common Issues and Limitations
While both metrics are powerful, they aren’t perfect:
- Best Possible DSO assumes all invoices are paid exactly on time — not realistic for all customers.
- Standard DSO can fluctuate due to seasonality or one-off large invoices.
- Both require accurate, up-to-date AR data to be meaningful.
- Industry norms differ — what’s “good” DSO in manufacturing may be high for SaaS.
The key is to use both metrics together as part of a holistic AR management strategy.
Conclusion
Standard DSO shows how long it actually takes to collect payments.
Best Possible DSO shows how quickly you could collect payments in an ideal world.
By tracking both, you gain visibility into your cash collection gap — the difference between operational performance and potential performance.
Finance leaders who consistently monitor both metrics, benchmark against peers, and use automation to close the gap can unlock faster cash cycles, better liquidity, and stronger financial resilience.
To know how to ace the Best Possible DSO, you can check out FinFloh Collections Hub AI product.
