DSO is only one of the several accounts receivable key performance indicators (KPIs) that you can use to track the health and operation of your business. Armed with the information gathered through these critical metrics, your leadership team and other key decision-makers will make smarter decisions about your finances and cash flow. If customers have a history of paying severely late, it could be a sign that you should stop extending payment terms to them. Not every dso meaning customer is going to be the right fit, so it’s important for the health of your cash flow to identify at-risk customers early and take action to bring them back on track—or walk away. In this article, we’ll explain what days sales outstanding is, the value of tracking it, and how to calculate it. We’ll also explore the average DSO values across industries to help you benchmark your performance and provide strategies for improving your DSO accounting methods.
She is passionate about telling compelling stories that drive real-world value for businesses and is a staunch supporter of the Oxford comma. Before joining Versapay, Nicole held various marketing roles in SaaS, financial services, and higher ed. 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.
Why Days Sales Outstanding is important to your business
It’s not necessarily a cause for concern but certainly signal for closer examination and possible intervention. Consistency or improvement in DSO figures is generally more favorable than fluctuating or increasing trends. Or maybe you didn’t properly structure your credit terms to incentivize early payments — or discourage late ones.
- When you have a shorter DSO, you are able to quickly meet immediate financial obligations like paying salaries, purchasing inventory, and covering operating expenses.
- Fast credit collectability decreases problems related to paying operational expenses, and any excess money that is collected can be reinvested right away to increase future earnings.
- In an era of heightened interest rates and economic uncertainty, maintaining a healthy cash flow has become more vital than ever.
- Beyond the score itself, you should also pay attention to how your DSO is trending — is it going up or down?
- Besides, these factors help the senior management detect error-prone areas and formulate an action plan to eliminate them.
- Here’re some common use-cases where organizations misinterpret DSO, hindering their potential for improvement and growth.
- However, you can avoid this and make your DSO better by offering discounts to customers who pay early.
For those businesses that repeatedly miss payment deadlines, consider limiting or ending their pool of credit or renegotiating payment terms. It might also prove useful for bolstering your initial credit checks to avoid accumulating more delinquent purchasers. Rather than focusing on the time required to complete collections, CEI instead captures the amount of debt paid off during a set period of time. The appropriate average for your organization will also depend largely on your industry and the nature of your business.
How to Lower Days Sales Outstanding (DSO)
Therefore, companies will need to make sure those changes stick and people do not return to the old ways of doing things. The DSO value depends on the size of your business, and there’s no one-size-fits-all here. For example, a DSO of 45 days may not be a problem for a large-scale business, but it is terrible for a small-scale business. For our hypothetical clothing retailer, it is presumably necessary to improve its current collection methods, as confirmed by its DSO trailing its industry peers (i.e. competitors).
Join the 50,000 accounts receivable professionals already getting our insights, best practices, and stories every month. 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. According to the Credit Research Foundation’s (CRF) National Summary of Domestic Trade Receivables, the median DSO for companies across a variety of industries in Q3 of 2021 was 37.69 days.
Judging DSO Without Monitoring Your Invoicing Process
In this post we explain the why, what and how of this important metric — before explaining how process mining can improve DSO ratios. Much as the name suggests, the best possible DSO for a given timeframe captures the optimal DSO score your business could have received if everything ran perfectly. And by comparing your current performance against your potential, you can more easily identify efficiency challenges. A low DSO means that the company is collecting payment from its customers rapidly and is therefore able to make better use of its working capital. Suppose we’re tasked with forecasting the accounts receivable (A/R) balance of a hypothetical company that reported revenue of $200mm in 2020. Therefore, the only remaining step is for the customer to hold up their end of the bargain by actually paying the company in cash.
Storing your customers’ credit card details is an easy way to get paid, since you can charge them right on the due date. All you have to do is inform your customers regarding this policy once you set up the system. Over the course of the projection period, the company’s management team expects revenue to grow at a constant rate of 10.0% each year. But over the course of the waiting period, the company has yet to be paid in cash, despite the revenue being recognized under accrual accounting.
Days sales outstanding industry average
A rapidly fluctuating score commonly indicates a potential problem with your cash flow. You’ll notice that because the wrestling ticket sales were solely composed of cash transactions, they were not used in the DSO calculation. The vineyard holds amateur wrestling matches in a ring filled with grapes for two nights each week. Now, we can project A/R for the forecast period, which we’ll accomplish by dividing the carried-forward DSO assumption (55 days) by 365 days and then multiply it by the revenue for each future period.
- Keeping DSO aligned with industry standards ensures a company can cover its immediate needs, seize growth opportunities, and maintain leverage in financial negotiations.
- The sales figure of a company will always be reported in the company’s income statement.
- A lower DSO means customers are paying their bills relatively quickly, which is like café customers paying right after they finish their coffee.
- Much as the name suggests, the best possible DSO for a given timeframe captures the optimal DSO score your business could have received if everything ran perfectly.
- Spanning collections management, credit management, and dispute management, these apps are designed to help companies optimize working capital through strong Accounts Receivable management.
- Remember, effective DSO management is a balance of enhancing liquidity and financial health, and should be part of a broader strategic financial plan.
- Those payment terms must carefully balance the company’s own DSO goals against common industry practice, as well as customer needs and expectations.