Software as a service transformed the way tech companies generated profits. It turned software development into a truly profitable field. This is even more reason for SaaS companies to properly manage their working capital.
One issue is that vendors and customers are often at odds. Vendors want to accelerate payments while customers want to delay them. Calculating days sales outstanding (DSO) for SaaS companies makes it easier to manage this balancing act.
1. Why Use DSO for SaaS Companies?
Before determining if DSO is right for your business, it’s important to understand what it is. DSO calculations help companies determine how long it takes to convert sales into cash. Companies carefully tracking this metric have a good grasp of their accounts receivable process. They can then use this information to determine the course of action to speed up how quickly they collect invoices to cover financial obligations.
For most software companies, vendors are a big portion of their financial obligations. This could include servers or paying licensing fees to larger corporations. In some cases, tech companies might also pay fees for placement in certain online marketplaces. These fees usually recur at specific times of the month, so software companies need adequate working capital to cover the costs.
The SaaS days sales outstanding software calculation makes it easier to manage cash. Bots can automatically complete these calculations so the companies always have access to up-to-date information.
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2. What’s the Difference Between RT and DSO?
It’s fairly common for business owners to use DSO and receivables turnover (RT) interchangeably, but there are noticeable differences. When comparing RT vs. DSO, RT measures how well the company is collecting revenue. This ratio shows how effectively the accounts receivables department handles extended credit.
The DSO benchmark helps companies determine how long it will take to collect invoices owed. It is calculated as a daily average measurement and businesses generally assess this annually. Ideally, every company wants to have a low DSO; it translates to waiting fewer days for payments.
Despite the differences, smart business managers use both metrics to manage their cash flow processes. In fact, there are some correlations between the two.
- When RT is low and DSO is high, it’s time to improve your process.
- High receivables and low DSO indicates income is on time.
3. How Can SaaS Companies Improve Their DSO?
If you need to improve your DSO, you aren’t alone. Companies often hire DSO professionals to reduce the average days’ collecting of cash owed. These professionals combine customer service and accounting skills to collect on payments through consistent and effective communication. There are also software applications that can achieve similar results and/or make your existing A/R collections team more effective.
It’s also important for SaaS companies to evaluate clients and customers. After all, those customers and clients are evaluating you. While customers look at specs and value for their dollar, SaaS companies need to determine whether these customers are low- or high-risk for payment default or late payments.
- Automation can simplify this process to make calculating risk as easy as touching a button.
- Automation can also help companies create and organize orders and invoices. Creating a transparent and automated process for organizing accounts receivables can also help clients get better organized, pay on time, and reduce errors.