Analyze DSO over multiple periods (e.g., monthly or quarterly) to identify trends. Look for patterns or anomalies that may indicate issues or improvements in your receivables process. Research industry standards and benchmarks for DSO to see how your company compares to peers. This helps identify if your DSO is within an acceptable range or if it needs improvement. If you’re dealing with persistently overdue accounts, it might be worth considering outsourcing your collections to a third-party agency.

By comparing your DSO against industry benchmarks, you can assess whether your credit and collections processes are competitive or need improvement. In essence, DSO is more than just a number—it’s a vital indicator of your company’s financial agility and ability to meet its short-term obligations. It means your company is able to collect payments from customers quickly after making sales.

Understanding Days Sales Outstanding (DSO)

In other words, it shows how well a company can collect cash from its customers. The sooner cash can be collected, the sooner this cash can be used for other operations. Both liquidity and cash flows increase with a lower days sales outstanding measurement. In many businesses, the days sales outstanding number can be a valuable indicator of the efficiency of the business and the quality of its cash flow. If the number gets too high, conversion cost calculator it could even disrupt the normal operations of the business, causing its own outstanding payments to be delayed. AR days measure how quickly a company collects payments, impacting cash flow and financial stability.

• Discounts for early payments are a great way to incentivize customers to pay faster.
• Delinquent Days Sales Outstanding (DDSO) is a good alternative for credit collection assessment or for use alongside DSO.
• This could be due to their reliance on physical inventory, which drives a need for quicker payment following a transaction.
• There are many terms you can offer to clients, and if you find certain customers are consistently behind on payments, it may help to shorten your payment terms.
• While these tips can certainly help improve DSO, businesses must also pay close attention to these instances to avoid any possible misinterpretation of DSO.
• Many clients may be accustomed to making payments using a certain method, which can create friction when it’s time for them to pay their bills.

Automate Invoicing and Collections Processes

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. A closer relationship means more loyalty, repeat business, and types of bank accounts better feedback on your product or services. If you have a higher DSO – that is, higher than your industry average – then you’ll want to reduce and improve it. Transitioning away from checks in favor of digital payments can help you collect payment faster, as you won’t have to deal with unpredictable mail delays. With an AR automation solution that gives your customers their own online portal, you can allow customers to access all their invoices and supporting documents, so they never have to wonder what they owe you. Don’t keep fighting with spreadsheets and manual processes to customize metrics.

Create Clear Policies on Late Payments

Divide your final accounts receivable by the total credit sales for the period (monthly, quarterly, or annually), multiply the result by the number of days in the period, and you’ll have your answer. As a small business owner, Max sells his goods and collects customer payments within 30 days of each sale. This prompt payment policy helps him keep the cash flow moving and ensures that he can cover his costs and continue to grow his business. Offering incentives such as discounts or coupons to early-paying customers can help improve your DSO. You can use an automated platform to communicate with your customers and run email campaigns to share incentives, encouraging early payments. While you’re at it, ensure there’s a penalty policy for what are different types of standards under standard costing late-paying customers too.

• Like any metric measuring a company’s performance, DSO should not be considered alone, but rather should be used with other metrics.
• Better than the average – which we all know isn’t that insightful – you’ll find below the median DSO for different industries.
• This may be because, as mentioned earlier, their need to maintain physical inventory encourages them to prioritize prompt payment after a transaction.
• Keeping a close watch on your DSO and how it’s trending helps you and your AR team identify potential issues preventing the business from collecting on its receivables as efficiently as possible.
• An increasing trend might signal difficulties faced by clients in making timely payments or problems within your own collections process.
• The product or service has been delivered to the customer (and thus, the revenue is “earned”).

What Is Days Sales Outstanding?

Days sales outstanding (DSO) is the average number of days that receivables remain outstanding before they are collected. It is used to determine the effectiveness of a company’s credit and collection efforts in allowing credit to customers, as well as its ability to collect from them. When measured at the individual customer level, it can indicate when a customer is having cash flow troubles, since the customer will attempt to stretch out the amount of time before it pays invoices. The measurement can be used internally to monitor the approximate amount of cash invested in receivables. Accountants use DSO to monitor cash inflows, ensure liquidity, and align payment terms with industry standards. Regular calculation helps reduce bad debt risks and improve cash flow management.

This calculation shows the liquidity and efficiency of a company’s collections department. Days Sales Outstanding in Accounts Receivable (DSO) is a critical metric for measuring how efficiently your business collects payments. It shows the average number of days it takes to convert credit sales into cash, offering insight into your accounts receivable performance. Days Sales Outstanding (DSO) is a financial collections performance metric used to measure the average number of days it takes for a company to collect payment after a sale has been made.

If the number is climbing, there may be something wrong in the collections department, or the company may be selling to customers with less than optimal credit. DSO is not particularly useful in comparing companies with significant differences in the proportion of sales that are made on credit. The DSO of a company with a low proportion of credit sales does not indicate much about that company’s cash flow. Comparing such companies with those that have a high proportion of credit sales also says little. It suggests how efficient the company’s collections department is, and the degree to which the company is maintaining customer satisfaction. A high DSO means that a company’s customers are taking longer to pay their invoices, which could indicate financial difficulties.

We then multiply 15% by 365 days to get approximately 55 for DSO, which means that once a company has made a sale, it takes ~55 days to collect the cash payment. Using an invoice email reminder template can help you decide what to say when you reach out. Picking up the phone and giving your customers a call can also speed up the collections process. Automating the accounts receivable process is simple when you use accounting software that integrates with your payment system and business bank account.