In our previous post, Atradius reported that Day Sales Outstanding (DSO) among businesses has increased in Singapore and across other countries in Asia over the course of the pandemic. What is it and how does it impact your business? We shall explore this in this article.
Day Sales Outstanding (DSO)
DSO is a financial metric that allows you to measure the average number of days your business takes to collect payment for a sale. This metric helps you reflect on how your collection process is performing and whether it needs to be tightened.
DSO can also help you analyse the credit worthiness of your customers. Any customer that has a DSO number that is trending higher may be showing signs that it is not credit worthy.
To calculate DSO, use values based in the same period:
(Total Accounts Receivable / Total Credit Sales Value) x the number days in the period
Please note that only sales made on credit should be used in the calculation.
How does DSO impact your business?
A high DSO number means that it takes your business longer to collect payments from your sales which suggests that your business may be experiencing delays in payments. This will have an impact on your business cash flow with cash going out at much faster rates compared to cash coming in. This means your business may not be able to meet expenses like salaries, rent and paying creditors. A strain on your relationship with your team and suppliers may start to emerge.
A low DSO number indicates that your business is getting payments quickly and perhaps promptly from your customers. Cash in-hand can then be used to fuel further business growth. Generally, a DSO under 45 days is considered low (which is good!). Please note that DSO numbers vary between different industries. We often see higher numbers in industries like construction, oil and gas and mining.
How to reduce DSO?
It is in best interest for any company to keep its DSO number low to prevent any potential cash flow issues. This means collecting any outstanding invoices showing in your accounts receivable as soon as possible. Here are a couple of suggested ways of doing so:
- Effective Collection Process; review your collection process, ensuring the below areas are covered:
- Issuing of invoice, ensure invoices are issued promptly and correctly according to your customer’s process.
- Monitor any overdue invoices and have a process in place for following up.
- Actioning overdue invoices, from payment negotiations with your customer to engaging a collection agency.
- Continuous monitoring of customers’ payment performance and adjust credit limits accordingly.
- Offer early payment discounts to increase the likelihood of early or on-time payment (optional).
- Consider an Invoice Finance facility that will allow you to get paid on your invoices upfront rather than wait the 30, 60 or even 90 days for your customer to pay. Your business can then quickly deploy the funds back into where the business needs it most.
DSO is a valuable indicator of your business efficiency and cash flow performance. Delays in collecting payment increase the likelihood of bad debt. Hence it is important to always pay attention to your DSO.