How to Reduce & Calculate DSO Priority Credit Management Corp

dso definition

Changes in DSO (up or down) reflex changes in key inputs from a company’s balance sheet. When your customers owe your company money, it impacts your cash flow which results in less revenue because past due accounts that surpass 120 days are more difficult to collect. If this happens, the opportunity for you to grow your company may not happen because you won’t have enough cash. Many companies will try to establish a benchmark for DSO in their industry and compare themselves with that. Companies will also monitor their days sales outstanding (DSO) and take note of any changes as indicators of the changing efficiency of their AR processes.

  • Generally, a DSO below 45 is considered low, but what qualifies as high or low also depends on the type of business.
  • Here’re some common use-cases where organizations misinterpret DSO, hindering their potential for improvement and growth.
  • This way, customers have less to think about and you know for sure you’ll be paid on time.
  • Cash is important in any business and it therefore paramount that a business collects its accounts receivables as quickly as possible.
  • In some sense it measures the balance between a company’s sales efforts and collection efforts.

By closely monitoring the business’s days sales outstanding metrics for a period of time, business executives can determine whether the business is getting more or less efficient and effective over time. They can also determine whether the business’s credit and collections policies need to be adjusted. Business executives can also evaluate how economic conditions are affecting the business’s performance. Tracking DSO is important because it’s a good indicator of a company’s financial health and helps you understand the company’s cash flow. On the other hand, a low DSO means the company is collecting payments quickly, which is a good sign of financial health. DSO can also be a good indicator of how well a company is doing at extending credit to customers.

Receivables Finance Enquiries

Days Sales Outstanding is often confused for “the time it takes to fully collect unpaid invoices.” Mathematically, there is no direct relationship between DSO and the number of days it takes a company to get paid. DSO is a measurement of the number of an average day’s sales that are tied up in receivables awaiting collection. Day Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes for a company to collect payment from its customers after a sale has been made. A business that is keen on reducing its days sales outstanding should begin by collecting data about its current days sales outstanding status.

dso definition

If your DSO is volatile and constantly changing from month to month, that’s something to pay attention to. However, a seasonal dip in DSO may not be too much cause for concern, especially if it happens at the same time every year. B2B customers also increasingly prefer to pay online as it’s more convenient. In a recent Versapay survey, the top reason finance leaders said they were offering their customers digital payment methods (cited by 76% of them) was that they’re simply easier for customers to use.

Limitations of DSO

It could be an indication that customer satisfaction is low and as a result, customers are taking their time to pay you. In that case, your sales team is likely extending credit to customers they shouldn’t. Days sales outstanding (also known as average collection period or days receivables) refers to the average number of days it takes for a company to receive payment after making dso definition a sale on credit. Losing revenue puts you in a vulnerable position because you may have to seek outside financing to increase your cash flow. If you don’t have the funds to pay your monthly operating expenses, your interest payment may increase your cash burden. If you hire a collections company to collect outstanding receivables, they may ask for a percentage of the balance.

It’s important to calculate and track your days sales outstanding (DSO) regularly so that you may identify trends you may have previously overlooked. If the numbers increase, it may indicate that the amount of time your manual process of collecting receivables takes more time than expected. Remember, the longer you take to collect payments may negatively impact your company’s cash flow. That’s why you may want to consider automating your accounts receivable process.