Days sales outstanding, also known as DSO, is the most widely used measurement tool in accounts receivable management. Unfortunately, everyone has to deal with it from time to time: overdue invoices. In the Netherlands, the average DSO among small and medium-sized companies is 45 days. If your payment term is 30 days, this already indicates that a large proportion of your invoices are paid too late. Fortunately, using a DSO formula, you can easily calculate your DSO and take timely action to prevent payment problems.
What exactly does Days Sales Outstanding entail?
- How quickly do my customers pay?
- Do I have my accounts receivable management in order?
- Are my customers creditworthy?
- Are my customers satisfied?
Calculate DSO
Per month calculation
Days Sales Outstanding (DSO) = (outstanding amount of invoices end of month/month sales) x 30 days
Calculate by year
Days Sales Outstanding (DSO) = (outstanding amount of invoices end of year/year sales) x 365 days
This is what a DSO calculation looks likeYouwould like to calculate the DSO, for example, for the month of May. At the end of May there is a total of 325,000 euros outstanding. Your monthly turnover is 337,500 euros.Using the monthly formula, you arrive at a DSO of 30 days. (325,000/337,500) x 31 days * = 29.85 days (rounded 30 days)
*number depends on the number of days in the month
High or low DSO
Managing and reducing the DSO is often the job of the credit & control department. If you have a low DSO (-well- under 45 days), it indicates that you, as a company, are close to your debtors and collect your invoices quickly. A high DSO (-well- above 45 days), on the other hand, shows that you take longer to collect your money. This can obviously be a choice but often indicates the credit management policy needs improvement.
Low
So a low DSO means that your debtors are generally paying outstanding invoices quickly. You are then likely to have a healthy cash flow. A low DSO can also be an advantage when you want to take out a loan from the bank. In their eyes, you then represent a low risk. However, it is important to know that a DSO that is too low does not have to be positive. Your policy may be too strict and you may be rejecting deals unnecessarily to avoid risk.
High
A high DSO means that your debtors are paying their invoices late or far too late which can lead to cash flow problems. Your company may run into financial trouble and even bankruptcy. In addition, banks are less open to extending credit.
Too high DSO, how can it be among other things?
- Business associates do not want to comply with payment obligations.
- You don’t have your accounts receivable management and/or billing process in order.
- You do business with large companies with long payment terms.
Tips to improve your DSO
Check the creditworthiness of your customers and prospects
There can always be a reason why an invoice is not paid on time. Still, you can catch a lot by doing business only with companies that can pay you. The chances of default are then significantly reduced. By checking the creditworthiness of your prospects in advance and monitoring your existing customers, you run considerably less risk as a company.
Improve your accounts receivable management using credit management software
Get your accounts receivable management in order by using specialized software.
Outsourcing accounts receivable management
Do you lack the time or manpower to perform your accounts receivable management properly? Then outsourcing your credit management is a good solution. All or part of your credit management will be taken out of your hands. The advantages for you as a company:
✓ Get your invoices paid faster
✓ Work is never at a standstill
✓ Good customer relationship
✓ Flexible in capacity
Want to know what CreditDevice can do for your business?
Request a no-obligation online demo or do a free credit check today!
