Days Sales Outstanding (DSO)
Definition
A ratio measuring how long, on average, a company takes to collect payment after a sale: (accounts receivable / revenue) x 365. Rising DSO, especially when revenue is also rising, is a classic indicator of revenue recognition fraud because fictitious or premature revenue creates receivables that do not convert to cash.
- Formula
- (Accounts receivable / revenue) x 365
- Field
- Forensic accounting, fraud detection
- Red flag
- Rising DSO alongside rising revenue
- Fraud type
- Revenue recognition fraud
Common questions
Why does a rising DSO alongside rising revenue specifically suggest fictitious revenue rather than normal business growth?+
Legitimate revenue growth is usually accompanied by cash collections growing roughly in step, but fictitious or prematurely booked revenue creates a receivable that has no real customer obligation behind it and so never converts to cash, causing receivables to grow faster than actual collections and pushing DSO upward over time.
Can a rising DSO have an innocent explanation unrelated to fraud?+
Yes, DSO can rise for legitimate reasons such as looser credit terms extended to win new customers, a shift toward larger corporate clients with slower payment cycles, or seasonal sales patterns, so investigators corroborate a DSO trend with other indicators like unusual entries near period-end rather than treating it alone as proof of fraud.
Related terms
- Bill-and-Hold
- An arrangement where title passes and revenue is recorded even though the seller retains physical possession of the goods at the buyer's...
- Bill-and-Hold Arrangement
- A transaction in which a seller invoices a customer for goods that remain physically on the seller's premises at the customer's request....
- Channel Stuffing
- A scheme in which a company ships excess inventory to distributors or retailers near a reporting period's end to record revenue, knowing...
- Fictitious Revenue
- Revenue recorded for a transaction that did not occur at all, or that involved a related party cycling funds to simulate customer...
- IFRS 15 / ASC 606
- The converged international (IFRS 15) and US (ASC 606) standards that replaced predecessor revenue rules from 2018. Both apply a five-step model:...
- Performance Obligation
- Under IFRS 15 and ASC 606, the distinct promise to transfer a good or service to a customer. Revenue can only be...
- Premature Revenue Recognition
- Recording revenue in an earlier period than the standards permit, typically by treating an uncompleted performance obligation as satisfied. The transaction is...
- Round-Tripping
- A circular transaction in which cash or assets flow between two or more related parties so that each records revenue without any...
- Side Letter
- An informal or undisclosed written agreement between a buyer and seller that modifies the terms of the primary contract. Side letters are...