A high DSO number means that it’s taking longer than you expected to collect cash from customers. However, by comparing a company’s DSO with other companies in the same sector, it may be possible to draw some conclusions about the company’s cash flow and working capital performance. It is used for the estimation of the average collection period and helps to determine the efficiency with which the company’s accounts receivables are being managed.
It barely takes five minutes to get started, and it has some of the best DSO optimization strategies implemented by Fortune 500 companies. 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. dso meaning competitors). Access and download collection of free Templates to help power your productivity and performance. 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.
Assess Customer Credit Risks
Here’re some common use-cases where organizations misinterpret DSO, hindering their potential for improvement and growth. The general rules of thumb to perform trend analysis on a company’s days sales outstanding (DSO) are as follows. Discounts for early payments are a great way to incentivize customers to pay faster. But because managing discount eligibility and applying those discounts to invoices properly can be a nightmare, teams are often hesitant to use them. But since DSO ranges wildly from industry to industry and from business to business, it’s a good idea to look at companies that are within your industry and have similar payment terms to see how you compare. To get a full picture of your company’s operations, it’s best to look at trends in your DSO rather than focus only on the number itself.
Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. The accounting period of a company is essentially its fiscal year, which more often than not has 365 days. Hence, we can safely assume that days in the company’s accounting period is 365 days. 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. The current dollar amount of open invoices, based on days since the invoice date.
Why is tracking DSO important?
Divide the total number of accounts receivable during a given period by the total dollar value of credit sales during the same period, then multiply the result by the number of days in the period being measured. 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. Days sales outstanding is an element of the cash conversion cycle and may also be referred to as days receivables or average collection period. Analyzing changes in DSO allows companies to assess customer credit risk more effectively.
DSO represents the number of days it takes for a company to convert its accounts receivables into cash. Since cash flow is the lifeblood of any business, the sooner the company gets that cash, the stronger its cash flow and financial position is likely to be. Bad debt occurs when customers can’t pay their dues, and this ratio measures the amount of money a company needs to write off as a bad debt expense compared to its net sales.
Credit and Investors’ Eyes
You don’t want to over-index on competitor benchmarks, but it’s helpful to have the context as a baseline. Reducing DSO typically requires changes to habits as much as administrative processes and procedures. Therefore, companies will need to make sure those changes stick and people do not return to the old ways of doing things. Boost your working capital with real-time actionable insights built to maximize productivity while reducing DSO! We also recommend reading this eBook with 13 proven strategies from Fortune 1000 companies on reducing DSO.
- Based on the risk level, you can extend your credit and prioritize risky customers to avoid bad debt.
- For the company, this means a lack of income, which ultimately pushes liquidity down.
- However, you can avoid this and make your DSO better by offering discounts to customers who pay early.
- On the other hand, a low DSO is more favorable to a company’s collection process.
- DSO represents the number of days it takes for a company to convert its accounts receivables into cash.
- We’ve explored practical strategies, from clear credit policies to utilizing technology, that businesses employ to optimize their DSO.
In the real world, though, payments tend not to arrive consistently or smoothly. On the other hand, if a company’s days sales outstanding (DSO) is decreasing, the downward trend is a positive sign suggesting the company is more efficient at cash collection (and thus has more cash). The calculation of days sales outstanding (DSO) involves dividing the accounts receivable balance by the revenue for the period, which is then multiplied by 365 days. A modern AR automation platform can be your business’ lifeline when it comes to staying on top of days sales outstanding and maintaining control of your cash position.
