Receivables Turnover vs. Days Sales Outstanding
Cashflow is the lifeblood of any business, and accounts receivable (A/R) turnover is the heart that keeps cash flowing. Optimizing your collections process is crucial for cashflow. The better you optimize collections procedures and tasks, the more efficient and effective A/R becomes.
These two KPIs aren’t perfect, but they inform decisions that ultimately determine how much cash you have available. It’s important for collections specialists and managers to understand both receivables turnover and days sales outstanding and how they’re calculated. This optimizes your collections process.
Sometimes, automation of accounts receivable processes might be just what you need to accelerate your cashflow.
Understanding Receivables Turnover and DSO
Receivables turnover and days sales outstanding work in tandem. Both define different aspects of your accounts receivable performance, and both need to be tracked and optimized.
Receivables turnover measures the effectiveness of your company’s revenue collection. It’s an indication of how well A/R handles extended credit and its process effectiveness.
Typically, accounts receivables turnover is measured as a ratio that compares your net credit sales against how many times you’ve collected receivables over a given period of time.
The goal is a high receivables turnover ratio. A higher receivables turnover ratio reflects a more efficient A/R department.
Days Sales Outstanding
Days sales outstanding is a metric representing how long it takes your company to collect revenue from a client or customer after the sale. Accounts receivable DSO is a daily average measurement that is often assessed annually.
How to calculate days sales outstanding is simple but important. DSO calculation requires input of your ending accounts receivable for a given time period against the credit sales during the same timeframe.
The goal here is a low days sales outstanding number. A lower DSO reflects faster cash collection.
What does all this mean?
You can get a good picture of how well your collections process is operating when you compare accounts receivable days from your receivables turnover vs. days sales outstanding.
- High receivables turnover and a low DSO means all receivables are returned on time.
- Low receivables turnover and high DSO means your process needs to be optimized.
Collections process optimization is a balancing act. Set reasonable receivables turnover and DSO goals depending on your industry. Don’t dip too low or too high, rather find a sweet spot that provides the necessary cash flow you need to grow.
Pitfalls of Receivables Turnover and Days Sales Outstanding
Both receivables turnover and days sales outstanding present a few glaring challenges that collection managers need to address for accurate reporting and financial forecasting.
Problems with receivables turnover:
- Could indicate credit lending policies are too lax or too strict (can be unclear)
- Doesn’t give you the “why” behind the numbers
Problems with days sales outstanding:
- Not only affected by payment terms, but also by quality of collections
- Can dramatically change even when business is booming
- Does not take seasonal slumps or sudden sales spikes into consideration
- High DSO and lax credit policies could mean a flawed process or errors
- Low DSO and strict credit policies could mean lost business
Ideally, both receivables turnover and DSO should be collected and assessed monthly or quarterly. Annual check-ins just aren’t enough for improving enterprise DSO and receivables turnover in an impactful, timely way.
Automate A/R Collection to Improve Cash flow
You gain a clearer picture of your accounts receivable process when you combine receivables turnover and days sales outstanding metrics then act accordingly.
Growing companies face growing pains. Innovative solutions like using accounts receivable automation software are a requirement. Sometimes, it’s not feasible to control open invoices, engage clients on scale, and measure the success of your collection process when you’re focused on the big picture. Gaviti’s automated A/R collection platform can accelerate cashflow and improve DSO on average by 30%. Automating important A/R tasks eliminates hours of manual work and helps organizations like yours get paid faster.