All you have to do is inform your customers regarding this policy once you set up the system. You’ll also have to notify your customers before and after you charge them. You should consider having a discretionary payment date relative to your relationship with them i.e. more flexibility with long-term customers and bigger accounts. Focusing on rewarding rather than penalizing customers is a good approach. A closer relationship means more loyalty, repeat business, and better feedback over your product or services. It means the average number of days or average collection period your clients take to pay you is 36. And since overdue invoices are more likely to never get paid, you also face the risk of never seeing the money your clients owe you.
With DSO, you can measure the efficiency of your collection process and come up with practices to get paid quicker. Getting paid quicker means more funds to reinvest for your business operations. With the right tools at hand, you can master your accounts receivable process and stay on top of your cash flow. There is not an absolute number of days sales outstanding that represents excellent or poor accounts receivable management, since the figure varies considerably by industry and the underlying payment terms. Generally, a figure of 25% more than the standard terms allowed may represent an opportunity for improvement.
What is Days Sales Outstanding (DSO)?
By facilitating early payment, both types of solution can enable suppliers to reduce their DSO. In this example, this would be the total sales for January, February, March. In this example, this would be the total open receivables for January, February, March.
In addition to job costing and looking at profit margins, there is another critical KPI that service organizations need to watch. The day sales outstanding is a calculation used to estimate the average length of a company’s collection period. Compare a company’s days sales outstanding to past financial ratios or to companies within their industry. Days Sales Outstanding helps you understand the liquidity of a company’s current assets.
How to Interpret Days Sales Outstanding (High vs. Low DSO)
Simply put, your DSO is the number of days it takes for your business to get paid. When the DSO is low for a business, it implies its good performance, https://www.bookstime.com/ while having a low A/R Turnover ratio indicates infrequent cash flow, which is not a good thing for any business from any sector/industry.
- Besides, with automation, you can automate payment reminders, formalize collection processes, monitor payment status, and customize invoices for every customer.
- Also, providing online payment options will often get you paid quicker compared to conventional modes of payment.
- Your sales team should tell the customer the payment terms at the point of the credit sale to ensure you’re being transparent from the outset.
- And the Collection Effectiveness Index is one of the best contextual indicators for DSO that there is.
That’s especially handy if you’re preparing a financial report for your CEO or board. More importantly, it saves you time, which you days sales outstanding can spend on strategizing and problem-solving. A high DSO shows you are basically extending an interest-free loan to your clients.
Applications of DSO
This does not only help in the obvious way of being paid earlier, the willingness to pay is also greater directly after delivery of your product. In order to calculate the total value of your sales, you can use the turnover in a given period. The total amount of your accounts receivable is measured at the end of the given period. Once you have compared your Days Sales Outstanding with other businesses in your industry, you should focus on improving this number.
- It avoids questions about your invoices and it reduces the chance of having to send a new invoice.
- A high DSO number can indicate that the cash flow of the business is not ideal.
- The cost of funding is based on the customer’s credit rating rather than the suppliers, typically resulting in a lower cost of funding.
- If a client overpays or a credit sales note is issued, this needs to be linked to an invoice for the calculation of DSO to be accurate.