Cash flow is critical to a business’s operations and future growth prospects. One effective way to manage and track cash flow is by calculating Days Sales Outstanding (DSO). DSO measures the average time between a sale and the receipt of payment from the customer, typically expressed monthly, quarterly, or annually. By monitoring DSO, business leaders and managers gain valuable insights into the pace of their collection process. This allows them to make informed decisions about future revenue and make necessary improvements to their collection methods.
Keeping days sales outstanding in check is vital for ensuring a business’s financial stability and longevity. It is due to the fact that it directly affects the amount of cash available to fund daily operations, investments, and future growth. Continue reading and learn more about DSO, why days sales outstanding is essential in small businesses, and how you can improve your DSO.
What do you mean by days sales outstanding?
Days Sales Outstanding (DSO) is a vital metric that every small business owner should be familiar with. It measures how quickly a business collects payment from their customers after a sale. By keeping an eye on their DSO, business owners can better understand the efficiency of their sales and credit collection processes. A high DSO can indicate a problem with collecting customer dues on time, which can cause cash flow problems for the business.
On the other hand, low days sales outstanding indicates that the company is doing an excellent job of collecting payments, resulting in improved cash flow and increased profitability. In some instances, a low DSO is also an indicator that your sales are low or that your customers are not happy with the credit terms that you offer. However, DSO is not an absolute metric and differs from industry to industry. You will need to factor in other aspects while determining if you have the ideal DSO for your business.
Managing cash flow is critical in today’s fast-paced business environment, and monitoring days sales outstanding is an essential part of this process. This metric can also provide valuable insights into a business’s customer base, helping the owners make informed decisions about which customers to target for credit and which ones to avoid.
Why days sales outstanding is essential for small businesses?
Days sales outstanding are crucial for businesses to monitor their cash flow and ensure financial stability. The speed at which a company converts its credit sales into cash is vital for paying salaries, buying inventory, funding operations, and reinvesting in the company. DSO measures how quickly a company is collecting payments from its customers and helps finance managers and executives track their company’s financial health and make necessary adjustments to their credit and collection policies.
In addition, days sales outstanding also allows accounts receivable staff to identify trends with individual customers and potential cash flow issues early on. By monitoring and managing their days sales outstanding, businesses can ensure they have the resources needed to grow their business and meet their financial obligations.
Days sales outstanding formula
Days sales outstanding, also known as debtors’ day, calculates the average number of days a business takes to convert credit sales to cash. The formula for DSO relies on three variables:
- The average accounts receivable during a specific period
- The number of sales made on credit during that same period
- The number of days in the period
(Average account receivables in that period/ Credit sales made in that period) * Number of days in that period
How can you improve days sales outstanding?
Evaluating individual days sales outstanding can provide a quick snapshot for assessing cash flow at a particular time. However, the longer-term trends are more insightful and help improve days outstanding sales.
Below are few points that will help you in improving your days sales outstanding:
- Implement credit checks: Conduct thorough checks on new customers before extending credit to them, and regularly review the creditworthiness of existing customers to minimize the risk of late payments
- Offer multiple payment options: Provide customers with various payment options, such as online payment systems or direct debit, to encourage prompt payment
- Offer early payment incentives: Consider offering discounts or other incentives to customers who pays their invoices on time to encourage them to do so
- Streamline invoicing and collection processes: Implement an efficient invoicing and collection strategy, such as automated invoicing and follow-up, to reduce the time it takes to receive payment
- Improve communication with customers: Regularly communicate with customers to understand their payment needs and resolve every issue impacting payment. This can build trust and strengthen customer relationships, improving payment times
Days Sales Outstanding provides insight into the company’s cash flow, customer payment habits, and the effectiveness of its credit and collections policies. Small businesses can increase their working capital by reducing DSO and ensuring timely customer payments. A low days sales outstanding can also improve the business’s creditworthiness and enhance its ability to secure loans and investments. In a nutshell, regularly tracking and improving DSO can have a significant positive impact on the financial stability and growth of businesses. Therefore, if your company faces higher aged debt and less liquidity, connect with EnKash today to get a receivables solution. Leverage this solution to send invoices and payment due reminders along with multiple payment options This spend management platform will help you streamline your bill payments, easily process your large number of outstanding invoices, improve your cash flow, and reduce your days sales outstanding.