Cashflow is vital to your business’s financial health. It’s the amount of money you have to pay bills, cover payroll, and purchase assets to grow your business. Without cash flow, your business won’t survive. That’s why companies need to manage cash flow by tracking key performance indicators (KPIs). One of the most important KPIs to watch is days sales outstanding (DSO).
What is Days Sales Outstanding?
Think of DSO as the average length of time it takes customers to pay. It’s a good indicator of cash flow speed. It also reflects the efficiency and profitability of your business.
How do you Calculate Your DSO?
To keep a finger on the financial pulse of your business, regularly calculate your DSO. That way, you can see if the number is increasing or decreasing, identify trends, and learn whether your DSO improvement strategies are working (or if they need adjusting).
Here is the days sales outstanding formula:
(Accounts Receivable/ Total Sales) x Number of Days = DSO
For example, if you wanted to calculate the annual DSO for a business with $22.5M in it’s A/R balance sheet and $150M in total sales, the formula would look like this:
($22,500,000 / $150,000,000) x 365 = 54.75 days
That means it takes customers an average of 54.75 days to pay their bills.
You can calculate DSO on a monthly, quarterly, or annual basis by adjusting the numbers in the formula to fit those specific timeframes. Instead of using annual figures, use your monthly receivables and sales totals and multiply by 30.
What Days Sales Outstanding Means for Your Company
Knowing how long customers take to pay their bills reveals a lot about your business. In general, a high DSO means there’s a lot of money left on the table. The goal is to bring that number down to boost your cash flow.
Days sales outstanding can also reveal other important information about your business:
- Customer satisfaction
- How many sales your company made during a specific period of time
- If you’re giving credit to untrustworthy customers
- The effectiveness of your collections department
Calculate your DSO regularly to identify trends. If you see the numbers increase, it could mean that your collections department is slacking, your customers are unhappy, or you should tighten up your credit allowances. Adjust your strategies and get those numbers on a downward trend.
What is a ‘Good’ DSO?
Because every industry is different, there’s no such thing as a “good” DSO number. For textile, apparel, and footwear manufacturers, 98 days is perfectly fine. Specialty retailers consider seven days “good.” On average, anything under 60 days is considered healthy; again, that depends on your industry, business model, and payment options.
Generally, the lower, the better.
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Problems with Days Sales Outstanding
Tracking your DSO is certainly helpful to keep an eye on your cashflow, but it’s by no means the perfect indicator of your business’s financial health. When you calculate days sales outstanding accounts receivable, take the number with a grain of salt.
Here are a few problems with DSO:
- Affected by payment terms
- Varies on the quality of collections
- Can change dramatically even when business is booming
- Doesn’t consider seasonal slumps or spikes
These problems are why it’s important to run several KPIs, like A/R turnover, when managing your cash flow. They can give you additional insights that DSO might overlook.
Reduce DSO with Automated Accounts Receivable Software
The more time it takes to process invoices and collect payments, the longer it’s going to take customers to pay. If you can automate processes and eliminate hours of manual work, you’ll accelerate your cash flow and get paid faster. Using an automated A/R platform like Gaviti can improve your accounts receivable days outstanding by an average of 30%.
Automate your A/R collection with Gaviti and get the cash flow you need to grow your business.