Days sale outstanding is one of the most widely used criteria for judging the effectiveness of your accounts receivable strategy. It also paints a picture of the health of your company. Most business managers use the standard DSO when running the calculations, but it is also possible to calculate the best DSO. So, what is the difference and why does it matter?
What Is ‘Standard’ DSO?
This term describes the average number of days it takes a company to turn invoices into cash. It includes both the current receivables and overdue invoices. There is no ideal number, but the shorter the cycle, the easier it is for a company to meet its financial obligations.
Most often, managers use a timed cycle to calculate DSO. This generally manifests as monthly, quarterly or annually. Because it can be calculated and recalculated regularly, it shows a detailed picture of progress over time.
(Ending Total Receivables ÷ Total Credit Sales) x Number of Days
What Is the ‘Best Possible’ DSO?
The main difference between these two calculations is that best days sales outstanding does not take into consideration past due invoices. This creates an ideal to aspire to, but it’s important to remain realistic. It is virtually impossible to arrive at the same number for both, no matter how good your credit policies are. Even so, getting the standard DSO within three or four days of the best DSO can do wonders for your company’s financial health and longevity.
Best Possible DSO Formula
(Current Receivables x Number of Days in Period) ÷ Credit Sales for Period
What Is a Good DSO Ratio?
Even though your specific, ideal number may come from best days sales outstanding calculations, you will need to consider industry and economic realities to arrive at a good number. Experienced accountants and accounts receivable professionals will know what the average is for the industry and adjust it for company size.
Naturally, the smaller the number, the better your performance. Most companies consider a DSO under 45 days to illustrate decent performance.
How To Improve Your DSO
DSO improvement is synonymous with improving cash flow and credit management. The work begins with reviewing AR strategies. Thankfully, there are tech tools that can simplify the process.
1. Scrutinize Each New Client
It may make the upfront work easier to give each new client the same payment terms, but this can backfire in the end. Make your decision based on an independent assessment of the company and its payment history. This significantly reduces the likelihood of providing bigger credit allowances to companies that lack the cash flow or integrity to repay in a timely manner.
2. Communicate Regularly and Clearly
Accounts receivable collections teams can clear up a significant portion of payment delinquencies with effective communication. Sometimes, clients genuinely forget. Other times, they remember but prioritize the companies harassing them. Finally, offering more payment options might increase the odds of you recouping the full balance on the invoice without a fight.
3. Try Automation for DSO
The better your accounts receivable collections strategy is, the more you need automation. It helps you reduce all the monotonous tasks you would otherwise handle, so you can focus on matters that require creative genius. Automating the process also reduces the likelihood of some unpaid invoices going unnoticed and unaddressed because they slipped through the cracks.
How Gaviti Can Help
At Gaviti, we have dedicated our business to getting your business paid faster and easier. We help our clients streamline their collections efforts and improve their DSOs by leaps and bounds. Our goal isn’t to replace your collections team, but to make their jobs easier and more effective.
Get started with a free demo.