Days sales outstanding (DSO) is a working capital ratio which measures the number of days that a company takes, on average, to collect its accounts receivable. The shorter the DSO, the faster the company collects payment from its customers – and the sooner it is able to make use of its cash. Since days sales outstanding (DSO) is the number of days it takes to collect due cash payments from customers who paid on credit, a lower DSO is preferred to a higher DSO. Days sales outstanding can vary from month to month, and over the course of a year with a company’s seasonal business cycle.
Days Sales Outstanding
But if you expect to be paid in 30 days or less, and it’s actually taking an average of 55, this is something you’ll want to dig into. You should consider having a discretionary payment date relative to your relationship with them i.e. more flexibility with long-term customers and bigger accounts. A closer relationship means more loyalty, repeat business, and better feedback on your product or services. By taking these steps to lower DSO figures, businesses will experience a boost in the efficiency of their days sales management. Increase the likelihood of your getting paid on time by nudging customers with friendly reminders as a payment date approaches. That means it takes the business on average 51 days to collect on their invoices.
Incentivize early payments with discounts
To get a full picture of your company’s operations, it’s best to look at trends in your DSO rather than focus only on the number itself. To do a DSO calculation for a given period (a single month for instance) you’ll need to know your total receivables and total net credit sales. To determine your net credit sales, take your total sales made on credit terms and subtract any returns or sales allowances. On the flip side, a high DSO can signal easy credit terms and possibly increase sales – at Bookstime the risk of tying up valuable cash in outstanding receivables, which could strain your team’s finances. Properly managing DSO helps your business ensure it has enough cash for day-to-day operations and future growth, marking a well-run company.
- Utilizing this computation equips enterprises with critical insights into their accounts’ performance over time, highlighting potential areas within collection practices that may require enhancement.
- This not only incentivizes customers but also secures more cash for the business and reduces the number of invoices that need to be processed or chased on a monthly basis.
- The DSO value depends on the size of your business, and there’s no one-size-fits-all here.
- An uptick in days sales outstanding might reveal problems related to client payment contentment or lenient credit terms set by the company.
- Please do so by adding these two figures together and dividing them by two.
Benefits of Accounts Receivable Automation
Factoring with altLINE gets you the working capital you need to keep growing your business. This strategy is excellent for fostering close customer relationships but can hurt your liquidity if you aren’t careful. Frequently audit your accounts receivables to ensure credit terms aren’t hurting your business. This DSO calculation means it takes the company six days on average to collect payment. Monitoring DSO metrics will help you assess the business’s financial stability. It also forecasts cash needs, helping you pay your debts on time dso meaning while covering planned expenses.
Leveraging Technology: Reducing DSO with Centime’s AR Automation
An increase in DSO can result in cash flow problems, and may result in a decision to increase the creditor company’s bad debt reserve. DSO is typically calculated monthly or quarterly to provide timely insights into accounts receivable performance and cash flow management. A high DSO number can indicate that the bookkeeping cash flow of the business is not ideal.
- With the right tools at hand, you can master your accounts receivable process and stay on top of your cash flow.
- Having cash on hand also enables you to take advantage of early payment discounts from suppliers and reduces the need for external financing, which can come with high-interest costs.
- You should consider having a discretionary payment date relative to your relationship with them i.e. more flexibility with long-term customers and bigger accounts.
- DSO, or Deferred Surplus, is the amount of time it takes for a company to collect its outstanding receivables.
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- It won’t necessarily improve your average DSO, but invoice factoring can bridge gaps in cash flow.