Days Sales Outstanding or DSO is a measure of the average number of days a company needs to collect revenue post sales. DSO is often calculated on a monthly, quarterly or annual basis and a low DSO indicates less time taken to collect accounts receivables. A higher DSO value suggests sales on credit and longer time taken to collect revenues.
For growing companies, as well as for established ones, it is a known fact that poor cash flow hinders business efficiency. It is in the organization’s best interest to collect outstanding receivables on time because time spent by an organization to receive cash can mean lost investment opportunities to make more sales.
In accounting, the DSO ratio is calculated with the formula
Days Sales Outstanding= Accounts Receivables / Net Credit Sales * 365
For example, your accounts receivables sums up to $20,000 and your net credit sales is $1,40,000 (sales not paid for immediately), the DSO stands at 52 which means it takes your organization an average of 52 days to collect receivables. If you have a 30days policy, the number indicates that you need to speed up the rate at which you collect payment from your customers.
So what can organizations do to ensure a lower DSO?
There are a number of measures and several approaches a company can undertake to encourage customers to pay on time so as to reduce the DSO.
Don’t sit on your invoices and wait for them to pile up. A well planned invoicing process can significantly impact the DSO. Start with setting clear payment terms in writing to ensure prompt payment. Send timely and accurate invoice and statement information to your customers. Incentives for faster paying customers can also be arranged. Offer flexible and customer friendly payment modes like electronic payments to help your customers make payments without any hassle.
Credit professionals often spend a lot of time on manual processes that can be automated to the point where they are much easier to manage. Implementing an accounts automation solution can crucially improve an organization’s DSO. It ensures transparency and allows you to focus more on your accounts receivables. There are also instances when a customer has already made a payment but it hasn’t reflected on the system yet, as the collection team may still be following up on it. Chances of customer dissatisfaction is higher in such cases. When accounts receivable processes are automated, there is better and real-time visibility and clarity on the receivables status. Automation assists you to keep your reliable customers happy, which is healthy for your DSO.
Evaluate Business Credit
Before initiating business with any company, run through the organization’s business credit report to determine if the organization is in a financially secure position and to decide if they are the correct company you should be doing business with. It is very important to thoroughly review the business credit of all on boarding customers prior to offering contract terms. There should also be a process in place for updating credit details on a regular basis. This helps you to steer clear of the risks associated with late payments and bad debts.
Collections and Receivables Management
Another method of reducing the DSO is to have a consistent collections and receivables management system in place. Follow up with customers to confirm that they have received their invoice before the due date and follow up with them once again as soon as they are past the due date to get commitment on the payment. Send polite reminders if customers are late on their payments and ensure that your collections team is regularly following up with them. Review aging reports on a regular basis to stay on top of things.