The credit terms a business offers to its customers can significantly affect DSO. Shorter payment periods, such as Net 30 or Net 45, generally lead to quicker payments and a lower DSO. On the other hand, longer credit terms (e.g., Net 60 or Net 90) might increase DSO, but could also help in fostering stronger customer relationships or gaining a competitive edge.
In some sense it measures the balance between a company’s sales efforts and collection efforts. If sales decreases in isolation DSO will increase indicating that may run into cash flow problems in future when the sales dip flows through the collection cycle. If sales decreases proportionally to accounts receivable, DSO will not increase. While this may not be welcome news, it does not indicate a change in the balance of sales and receivables, and therefore will not affect DSO.
Each of these tactics hinges on your ability to cut down on the amount of time spent simply calculating DSO. This is a deceptively complex metric, giving you a prime opportunity to leverage automation to drive efficiency. This is largely because you’re not dealing with cash sales the way you would in consumer packaged goods or retail.
Industries with highly seasonal sales, such as consumer durables or holiday-centric products, might encounter a high DSO during off-peak periods. Customers might take a longer time to pay their invoices, resulting in an increase in DSO. Conversely, industries with stable sales throughout the year, such as utility companies, might exhibit more consistent DSO figures.
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. Days sales outstanding (DSO) is one of the best indicators of your business’ well-being. Keeping a close watch on your DSO and how it’s trending helps you and your AR team identify potential issues preventing the business from collecting on its receivables as efficiently as possible. Given that John was targeting a 30-day collection period, his DSO of 31 days is good for his business. John can remain confident that his accounts receivable process is in good shape.
The debt collections experts at Atradius suggest that tracking DSO over time also creates an incentive for the payments department to stay on top of unpaid invoices. Needless to say, a small business can use its days sales outstanding number to identify and flag customers that are weighing it down by not paying promptly. While the DSO provides valuable insights about a company’s credit collection efficiency, it is not a standalone indicator. Also, consider other credit management metrics to get a thorough understanding of the company’s overall financial health. By doing so, the variations in DSO across different industries due to varying credit and sales strategies can be better understood. Gross days sales outstanding (DSO), looks at the average time it takes a company to collect revenue after a sale has been made, solely based on all accounts receivable.
The time it typically takes to collect payment from your customers after you’ve delivered a product or services. Encourage customers to pay invoices sooner by offering a discount for early payments. Offering an incentive, such as a discount for prompt payment within ten days or making upfront payments, can incentivize customers to prioritize your invoices. Understanding and managing “Days Sales Outstanding” (DSO) is crucial for financial success. A low DSO means quicker payment collections, ensuring a steady cash flow, essential for operational stability and growth opportunities. Conversely, a high DSO might indicate inefficiencies in collections, potentially straining cash reserves.
While customer retention is important, if a customer is constantly paying you late despite repeated reminders and penalties, you may have to re-evaluate your business ties with them. Say, if your average DSO is 38 days and your customer pays after 55 days, it’s time to let them go. If the cost and effort in Accounting For Architects retaining a customer is beyond the average limit, continuing business with them might not be worth it in the long run. To understand the effectiveness of your accounts receivables process, analyze individual DSO values, and review trends in DSOs over time. Join BC Krishna, CEO of Centime, to explore how AR automation can transform your collections process, improve cash management, and delight your customers. A high DSO can indicate poor cash flow, potential bad debts, and inefficiencies in the accounts receivable process.
A low DSO reflects prompt payments, while a high DSO may indicate issues with credit policies or customer payment habits. Days sales outstanding can vary from month to month, and over the course of a year with a company’s seasonal business cycle. If DSO is getting longer, accounts receivable is increasing or average sales per day are decreasing. Similarly, a decrease in average sales per day could indicate the need for more sales staff or better utilization.
A high DSO ties up cash in unpaid invoices, increasing financial risk, while a low DSO ensures better cash flow. Financial analysts use it to benchmark performance, assess credit policies, and identify areas for improvement. Days sales outstanding tends to increase as a company becomes less risk averse. Higher days sales outstanding can also be an indication of inadequate analysis of applicants for open account credit terms. 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. In accountancy, days sales outstanding (also called DSO and days receivables) is a calculation used by a company to estimate the size of their outstanding accounts receivable.