If a company has $500,000 in accounts receivable and $2,000,000 in total credit sales over a period of 90 days, here’s how the DSO can be calculated using the formula mentioned above. Cash flow, on the other hand, is the total amount of money being transferred in and out of a business. If DSO is high, this means a company is taking longer to collect payment after a sale, thereby negatively impacting its cash flow. The funds that have not been collected yet are tied up in accounts receivable and are not available for other uses.

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. A measurement of how well a business collects outstanding (unpaid) customer invoices.

Benefits of days sales outstanding

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. 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.

Implications on Liquidity and Working Capital

Learn more about how you can streamline your accounts receivable operations with automation here. For instance, if you were calculating your DSO for January to March, Accounting For Architects your DSO formula would have you multiply the quotient by 90 days. Because if the lungs aren’t operating at maximum efficiency, neither is the rest of the body.

Collection Procedures

• Understanding these tendencies help refine your collection strategies for each customer, hence improving DSO.
• In traditional sectors such as Office & Facilities Management and Consulting, DSOs are notably higher, with businesses often operating on 90-day payment terms.
• Some AR automation tools allow customers to make payments from their account on a set timeline automatically.
• Your DSO is one of the factors that creditors will look at when considering whether to extend credit to your business.

There are a couple of reasons your days sales outstanding could be trending higher. It could be an indication that customer satisfaction is low and as a result, customers are taking their time to pay you. In that case, your sales team is likely extending credit to customers they shouldn’t. The differences between days sales outstanding and average collection period are nuanced and dependent on your industry.

• Combining DSO with other financial metrics offers a more comprehensive financial health picture, avoiding skewed interpretations due to its limitations.
• It’s a measure of the efficiency of a company’s collection practices and credit policies.
• For example, if your DSO is rising, it might signal that customers are taking longer to pay due to dissatisfaction with the product or service, financial difficulties, or too lenient credit terms.
• In this article, we’ll explain what days sales outstanding is, the value of tracking it, and how to calculate DSO.
• Businesses often struggle with maintaining consistent cash flow due to high DSO, arising from inefficient invoicing, poor communication with customers, and inadequate credit management.

Applications of days sales outstanding

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. When you discover past-due accounts, take action to remind clients of their overdue payments. Reaching out about past due payments can be challenging and even a little uncomfortable, particularly if your ability to pay your business’s bills depends on incoming cash flow from clients. Automating the accounts receivable process is simple when you use accounting software that integrates with your payment system and business bank account.

Computing the DSO monthly, quarterly, or annually helps businesses understand how quickly they receive or collect cash for their credit sales. In addition, it enables businesses to keep the cash flows balanced, thereby saving them from running short of funds in the long run. An effective way for businesses to use the DSO calculation is to keep it tracked month by month on a trend line — or a series of plotted data points indicating a certain pattern or direction. Using the DSO in this way can help companies see any changes in their business’s ability to collect payments from customers. A seasonal business can use a variation of this analysis by tracking the same month’s metric on a year-by-year rate.

Impact of Legal Frameworks on DSO

Ensuring that invoices are clear, accurate, and sent promptly can reduce disputes and speed up collections, helping keep DSO in check. With automation software, you can even automate and personalize these notifications, saving you the trouble of sending out dunning letters. Prompting your customers to pay in this way can also preserve customer relationships by avoiding the need for what could become confrontational collections calls. That means it takes the business on average 51 days to collect on their invoices.

Offering your customers a variety of payment options, like card payments and bank transfers will get you paid quicker, since your customers can opt for the most convenient payment option. Also, providing online payment options will often get you paid quicker compared to conventional modes of payment. If your team is looking to shorten your DSO and get paid faster, AR automation may be able to help. Try out our AR Automation ROI Calculator to see how much money your team can save by automating your receivables management. You should strive for a balanced DSO that supports cash flow without sacrificing customer satisfaction.

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. If you work on net-60 payment terms, you might be happy with this performance. But if you expect to be paid in 30 days or less, and it’s actually taking an average of 55, this is something you’ll want to dig into.

Since the onset bookkeeping and payroll services of the pandemic, C-suite leaders have leaned on their finance teams more than ever to inform their decision making. In 2020, 65% of CFOs reported engaging with their CEOs about company performance more often, according to a McKinsey survey. The DSO value depends on the size of your business, and there’s no one-size-fits-all here.

The days sales outstanding formula shows investors and creditors how well companies’ can collect cash from their customers. This ratio measures the number of days it takes a company to convert its sales into cash. A high Days Sales Outstanding (DSO) indicates that a company is selling its products or services on credit but takes a long time to collect payments from customers.