How to Determine the Increase in Cash Flow by Improving DSO

October 18, 2020

Days Sales Outstanding (DSO) is a metric with big implications for your company’s cash flow.

This relatively straightforward metric measures how long it takes you to collect payments from customers after issuing invoices. The lower your DSO, you’ll likely have more cash in your account.

When DSO is low, companies have better cash flow and more financial security. These funds can be diverted to other business tasks, such as marketing, in-depth report analysis, or other investments as needed. As such, accountants often use DSO as a measure of a company’s financial health relating to cash intake, liquidity, and sustainability.

How Do I Calculate DSO?

You should calculate DSO on a monthly basis to keep tabs on cash flow. If DSO is high, you’re missing out on revenue. But what constitutes a high DSO rate, and how do you measure it?

Annual DSO is a relatively simple calculation:

(Accounts Receivable / Total Sales) x Number of Days = DSO

For example, if your business had $25M in its accounts receivable (A/R) balance sheet and $200M in credit sales, the formula would look like this:

($25,000,000 / $200,000,000) x 365 = 45.63 days

This means it takes your customers an average of 46 days to pay their invoices. You can also calculate days sales outstanding on a more granular level to get an idea of cash flow from month-to-month. For example, to get an idea of your monthly DSO, you’d take the data in that month’s A/R balance sheet and perform a slightly different calculation

Let’s say you had $65M in August’s A/R balance and $40M in monthly sales. Here’s how the calculation would look:

($65,000,000 / $40,000,000) x 31 = 50.37 days

Here, we see it took your customers an average of 50 or so days to pay their invoices.

How to Improve Cash Flow and Lower DSO Through Automation

Lower DSO metrics mean less money tied up in your A/R balance sheet. In other words, more money in the bank. But how do you improve this number to boost cash flow?

The easiest way to improve A/R collections is to bill on time. Most customers don’t get behind on payments because they’re broke or out of malice. In general, payments get delayed simply because the service provider waits too long to issue the invoice. Plenty of companies end up chasing down delinquent customers at one time or another, but the delays might begin on your end.

Poor invoice management was understandable in the old days of A/R collections, where companies relied on spreadsheets and all transactions had to be logged by hand.

But automated A/R collection tools make these processes easy – and leave little room for invoice mismanagement for service providers. Backed by the benefits of accounts receivable automation, you can streamline many of the collections processes you’re currently doing by hand:

Sending emails to clients with overdue invoices
Tracking and measuring your clients in real time
Accessing and analyzing all data from a single dashboard
Setting parameters for exception handling

…and so on. Each of these processes takes time and comes with an inherent risk of human error.

There could be data entry errors in your ledger, payments may go unallocated, or items may be left open. Automation eliminates human error from the equation and creates a streamlined system of A/R collections that performs exactly as it should.

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Get Started With A/R Collections Automation

Leveraging automation can reduce DSO, which in turn increases your company’s cash flow. It can also reduce the rate of overdue invoices by ensuring invoices and reminders are sent in a timely manner.

All of this translates to helping your A/R collections teams work smarter – and harder – by freeing them to focus on the business tasks that demand hands-on attention. And in a world where automated receivables collection management exists, those tasks rarely have to do with chasing down payments or juggling invoices.

If you’re curious about how to improve DSO through innovative A/R management solutions, contact Gaviti. We’ll show you how automating your A/R collections process can redefine and unlock long-term efficiencies for DSO management.