How to Lower Days Sales Outstanding and Enrich Cash Flow

Suppose you own a business that has $25,000 in accounts receivable (A/R) on September 1st, 2019. Additionally, let’s assume you sell $45,000 on credit over that time period. While timely billing does not always solve the issue of unpaid invoices, it does generally correlate with timely payments. Include your accounting and finance managers in the data analyzing process so they can cooperate with each other on discussing the DSO status and how to reduce it. A higher DSO displays that a business is selling its products or services on credit and waiting a long time to actually collect the cash. On the other side, a lower DSO shows that a company is receiving the money sooner and can use that cash flow to invest in new ventures.

Lost revenue may also result in cash flow problems that may lead you to seek outside financing. If you can’t pay your monthly operational costs, your interest payments may increase your cash burden. And if you send the account to a collection agency, they may collect a percentage of the balance. But DSO is just one piece of the puzzle when it comes to analyzing business performance. Business owners should assess days sales outstanding alongside other KPIs and financial ratios to get a full understanding of business health.

How To Calculate Days Sales Outstanding (Or DSO)

Plus, it syncs QuickBooks Online, Quickbooks Desktop, Fidelio, FDS, and other tools, making your workflow perfectly seamless. An average DSO is 53 days, according to Celonis’s 2021 State of Business Execution Benchmark Report, based on an independent survey of 2,000 business leaders across six countries and eight industries. Each of these processes takes time and comes with an inherent risk of human error. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. The Days Sales Outstanding value for an enterprise, even for a single period, provides a reliable benchmark for assessing the enterprise’s cash flow. In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing.

Any payment terms need to be clearly and visibly stated to reduce the chances of confusion. Don’t make the mistake of putting them in the small print at the bottom of a contract or invoice. Your sales team should tell the customer the payment terms at the point of the credit https://kelleysbookkeeping.com/ sale to ensure you’re being transparent from the outset. DDO or Days Deduction Outstanding is a metric calculated to clarify how a business deals with its deductions. DDO is calculated by dividing the outstanding deductions by the average deductions in a certain period.

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According to the Celonis benchmarks report referenced earlier, on-time payment of suppliers happens only 50 percent of the time. In an uncertain business climate with frequent economic downturns, it is likely that this is due to the challenges companies face in closing their own invoices on time. According to the Celonis benchmark report referenced above, on-time payment of suppliers happens only 50% of the time. In an uncertain business climate with frequent economic downturns, it is likely that this is due to the challenges companies face in closing its own invoices on time. On the flipside of DSO is DPO (Days Payable Outstanding), and like DSO it can pack a major punch when it comes to cashflow performance.

There is not an absolute number of days sales outstanding that represents excellent or poor accounts receivable management, since the figure varies considerably by industry and the underlying payment terms. Generally, a figure of 25% more than the standard terms allowed may represent an opportunity for improvement. Conversely, a days sales outstanding figure that is very close to the payment terms granted probably indicates that a company’s credit policy is too tight. This can cause cash flow problems if customers don’t pay on time or in case of bad debt write-offs.

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This is because a company’s DSO value could change regularly on a month-to-month basis, especially if its products and/or services are of a seasonal nature. Should a business present a volatile DSO performance, this would be a cause for concern. However, if its DSO declines during a specific season every year, it may simply be a natural phenomenon that the management need not worry about. Technically speaking, firms could expect with some degree of confidence that they would be paid for their outstanding accounts receivables. However, due to the time value of money concept, any time spent waiting for the debt to be settled would be equal to money lost. At the end of the day, if you focus on your days sales outstanding and continue to work on your strategy, you’ll improve your cash flow.

Unless you’re in the business of lending people money – you should reduce your DSO. To measure your cash flow, you need to keep track of Days Sales Outstanding (DSO). The first step to projecting accounts receivable is to calculate the historical DSO. Over the What Is Days Sales Outstanding? How To Calculate And Improve Dso course of the projection period, the company’s management team expects revenue to grow at a constant rate of 10.0% each year. As a general rule of thumb, companies strive to minimize DSO since it implies the current payment collection method is efficient.

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But because of the time value of money principle, time spent waiting to be paid is money lost. Process mining can have a tangible impact on improving your DSO, shortening the period between invoice and payment. With the ability to visualize and optimize accounts receivable processes, you can pinpoint and address any areas of friction or inefficiency that add days to your DSO. DSO is a key metric for business success because it’s a reliable barometer of cash flow — at both an individual customer and organizational level. Consequently it also helps businesses make more accurate cash flow forecasts.

• Days Sales Outstanding (DSO) is a valuable metric for understanding the efficiency of a company’s credit and collections policies, and its impact on cash flow and financial performance.
• – Devising better strategies motivating the payment collections department to maintain a strong proactiveness in keeping outstanding accounts receivables at a minimum.
• On the other hand, a low DSO is more favorable to a company’s collection process.
• You’d have to choose a different time period (like 3 or 6 months) and then compare all these numbers together – that’s rescinding the simplicity.
• Your company should get ready to make major administrative policy changes and communicate their significance to the rest of the team to make sure they update their business procedures as well.

Simply put, DSO is a key performance indicator (KPI) used to study the company’s accounts receivables. In essence, tracking the DSO would be extremely advantageous to the business once they have comprehended the procedure behind its calculation. As a starting point, we highly recommend you download our free DSO calculator. This tool uses a DSO calculation formula to give you a clearer indication on current cash flow, accounts receivable and credit sales. You’ll gain a better grip on your DSO and will be able to monitor it all in one place for complete peace of mind and ease. Your customers are the lifeline of your business, and to grow, you need to retain them.

Accounts Receivable Turnover Ratio:

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. Once your strategies on DSO reduction are set, you need to make sure that your departments have goals that allow your DSO levels to remain stable for the long term. Therefore, your company needs to be adamant in your efforts to ensure your company does not return to its old ways of handling DSO measures. By continuously scheduling meetings to monitor your DSO levels, individuals within your company will understand the importance of this matter and continue their efforts to lower DSO.

If your DSOs are higher than they should be after benchmarking your performance with the rest of your industry, you need to address your strategy. This is why before jumping to a conclusion, the Credit and Collections teams should have a knowledge transfer with Sales teams. Every day that you’re doing work that your client hasn’t paid for upfront, you’re essentially giving that client a loan. Thus, it is critical to not only diligence industry peers (and the nature of the product/service sold) but the customer-buyer relationship. For this clothing retailer, it is probably necessary to change its collection methods, as confirmed by the DSO lagging behind that of competitors.

What is a good DSO ratio?

It’s important to start understanding your Days Sales Outstanding ratio and how it’s affected by your credit sales. At the end of the day, calculating DSO and reducing it is all about improving your cash flow. By taking some or all of the above steps, you can get paid faster and have more working capital available to keep your business running smoothly. Discounts for early payments can incentivise customers to pay their invoices sooner and help to improve your cash flow.

• High DSO means a company could be offering a lot of credit sales to customers and taking a long time to convert credit to cash.
• Also, to improve DSO, start leveraging the right tools – with the right tool, you can optimize the credit and collections process, thereby improving the DSO.
• Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs.
• Your DSO ratio tells you how efficiently you’re collecting cash from customers, so the more granular you can get with your calculations, the easier it will be to identify opportunities for improvement.
• Accounts receivable DSO is a daily average measurement that is often assessed annually.

If these payment terms are not closely aligned to DSO goals, it can impact collections. It is, therefore, important for companies to clearly define when they expect to be paid in their contractual agreements. For example, consider adding the invoice due dates and preferred payment method and currency. For companies continuing to recover from 2020—or even for those who are prioritizing resilience in our volatile economy—budgets are tight. Determining customer creditworthiness before extending credit is an important consideration to ensure timely payments.