Everything you need to know about Day Sales Outstanding (DSO)

August 06, 2020
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First, it is better, to begin with, the definition of DSO.

DSO or Day Sales Outstanding represents the average number of days required for a business to convert credit sales into cash flow. It can be measured monthly, quarterly, or annually. The calculations estimate the average length of the collection period of your business.

The article will discuss anything and everything about DSO. You will even learn how to calculate it. And why it is crucial to keep a healthy amount of DSO for your business.

Why measuring DSO is important?

Keeping track of DSO is the best thing that you can do to your business. Account outsourcing companies can prepare monthly reports. These reports can help you keep track of the DSO, and you can measure the direction of the trend's movement.

Why is it important to maintain DSO?

This idea can be tricky for a lot of people. You might think that ‘People say DSO must be reduced. But it should not be completely zero.’ Well, there are a few things to support this statement.

Firstly, high DSO can lead to cash flow problems in the long run because it is one of the primary metrics which can be used to calculate the cash conversion cycle of a business. So, a high DSO is a clear indication of a billing system that is too strict.

Secondly, low DSO is also very harmful to any business. Because it might indicate two things:

  1. Not many people are choosing your services and buying your product.
  2. There is something faulty with the billing system of your business.

So, what can be concluded from this part?

Well, DSO is like a sweet that you crave for. Having it too much will upset your stomach. And having it too little will hurt your feelings. It is always a good idea to maintain DSO to a healthy level.

How to reduce DSO?

At last, let us answer the burning question!

‘How to reduce DSO to an optimum level?’

Here are a few ways by which you can do it;

1. Timely Billing

Timely billing can be one of the easiest ways to reduce a day's sales outstanding. Fast billing will result in faster payment. Also, you can offer customers to save their credit card on your database. In this way, you can charge the customer faster. You can talk to the card company in advance, and you directly get your payments. Automation of the billing process will also ensure timely billings.

2. Improve your strategy

You must have heard the phrase, ‘When you point your finger at someone, three fingers are pointing back at you.’

If there is a great reduction in cash in-flow, you need to first look at your strategies. You need to identify if you are doing something wrong. You can opt to outsource accounting services so that you receive a monthly report. The detailed reports that they make will be very useful to understand the trend of cash flow.

3. Send payment reminders

Sending payment reminders on a regular interval can be another game-changer. By doing this, you are essentially reminding the customers that they have to pay you. Customers are less likely to forget about the payment. Thus, the cash flow will increase. Also, you will add a personal touch to your collection process. Your relationship with your customers will strengthen over time.

4. Offer a lot of payment options

Offering multiple payment options is an important step you can take. This will ensure that the customer can do business with you very easily. Providing greater flexibility to the customer will help you increase your cash flow. Make it easier for the customers to communicate with you so that you can understand where you are going wrong.

5. Know your KPI

Select your KPI or Key Performance Indicator. Know which KPI is the right one for your business. These indicators will make you understand how effectively the business is fulfilling its targets and achieving success. Choosing the KPIs must be based on the type of business and industry it is in. Account outsourcing will ensure all your KPIs are maintained.

Calculation of Days Sales Outstanding

There is a simple formula that you can put in place to know the DSO for your company. The formula is;

Days Sales Outstanding (DSO) = (Accounts Receivables) ÷ (Net Credit Sales) × (Number of Days)

Read also: 13 Financial health Key performance indicator in decision making

Conclusion

Keeping track of DSO is the best way to pump cash into the business. Speeding up the whole process will help you expand your business and continue for longer. Remember, small improvements can change the whole game. Analyzing is the key to the success of any business.

Finally, keep in mind that DSO should not be more than 10 to 15 days than its terms of sales. Hopefully, this article was useful to you!. For more details, please contact us at hgoyal@especia.co.in or 9310165114.

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