Day sales outstanding (DSO) is the term used to measure how much time it takes for a business to get paid for a product or service. The goal of a business is to keep the DSO as low as possible. The longer it takes a company to get its invoices paid, the greater the likelihood for a company to incur a cash flow problem. Days sales in receivables are the same thing as DSO.
DSO = (Credit Sales) x (# of Days)
Both the DSO and the days sales in receivables are calculated by taking the credit sales and multiplying them by the number of days in that period. For example, if you have $100,000 in credit sales and it takes an average of 60 days to collect payment from your clients, you need to speed up your payment time.
A high DSO can harm your business. It can adversely affect your cash flow, your yearly revenue, and your ability to invest and grow your company. Reducing the DSO will greatly improve the financial health of your company.
There are several strategies that you can implement to lower your company's DSO. First of all, you can make it easier for your customers to pay you. Be sure to offer multiple payment options to all of your customers. You should be offering automatic payments and credit card payments to all of your customers. By doing this, you are making it easier by being flexible on your payment terms for your customers. This strategy will improve your company's cash flow. Your customers will wind up paying you in a more timely fashion.
Be sure to implement strict credit approval for all of your new customers. This will help you avoid the deadbeats. Be sure that your sales department implements the appropriate process for credit terms for all of your customers. Credit apps that are not completed should be flagged. It is also important to have a procedure in place to update all the credit information on your customers regularly. Keep in mind that one's credit can change
All invoices should be sent out promptly to your customers. And offering incentives for early payment is also effective for reducing a high DSO. All invoices should specify the payment terms and the due dates for your customers. This way, you can avoid, you can avoid any miscommunication. Be sure to verify all mail addresses and email addresses before you send out any invoices to your customers. Automated reminders of payment due should also be sent out regularly.
Be sure to have a procedure in place for communicating with customers about late payment. It is important to understand why your customers are paying late. Are there issues with the product? Is there an issue with the invoice terms? Is there a discrepancy with the invoice? You need to get to the bottom of the problem with paying on time. Also, be sure to report on collections forecasting.
Your company needs to have a collection process in place. You also need to have employees who are well-trained to follow up with past-due accounts. Are they able to solve a dispute about payment with a customer? There should also be a designated time each day that your employees work on past due accounts by contacting customers.
If you have a customer who was continually late with a payment or unresponsive to payment, it is time to walk away from that customer. While no business wants to walk away from a customer, sometimes you must do it. The faster you collect for payment on your invoices, the quicker you can improve your cash flow situation. Reducing your DSO can go a long way when it comes to improving cash flow and increasing revenue.