Home Business Insights & Advice Why define your DSO (Days Sales Outstanding) as a company?

Why define your DSO (Days Sales Outstanding) as a company?

by Sarah Dunsby
6th May 23 11:22 am

It is a routine for many business-oriented individuals to honour consistent balance in life and business. These individuals will do everything they can to stay updated on the daily firm’s financial curves as the company experiences solid development. As your business grows, you must embrace a metric known as Days Sales Outstanding (DSO). There are times when you will remember to remind your clients of their pending payments and sometimes you have challenges keeping up. That is why you need to know more about this metric. Below is a review of DSO.

What is Days Sales Outstanding?

DSO can be described as the average number of days that a given business takes to collect pending payments from their customer after the completion of sales of products. You can also say DSO is the number of days taken to convert credit sales into cash. In most cases, DSO calculation is done after 30 days (month), but other firms do it on a quarterly/yearly basis.

Why should businesses improve their DSO?

Businesses need to improve their DSO to avoid problems related to cash flow and liquidity. In a simple explanation, a business that fails to collect the pending payment from the clients may struggle to cater for its expenses on time. When a business cannot pay its bills at the required time, it will be hard to operate and grow.

Another point is that a high DSO negatively impacts the business’s ability to get financial assistance. Many lenders tend to check on the company’s DSO; when it is high, they will not give you the help you need since they view it as an increased credit risk.

It will be easy for a business to minimise the duration it takes to collect payment from its clients and improve the cash flow. Doing so will enable them to avoid cases of liquidity and minimise the dependency on short-term financing. Also, they will be in a favourable position to access financial terms.

How can business reduce DSO?

Reducing DSO in a business, it’s very easy, and there are many ways to do it. Below are some of the major ways:

Get an online invoicing software

You need to have an organised and systematic way of receiving payments. The easiest way to do it is by investing in online invoicing software. With the software’s help, you can invoice your client on time about their pending payment once the sales have been made. An invoice software will help you track the payment process and set automatic payment reminders that need to be sent out.

Have more payment alternatives

Diversify your business with various payment options, don’t stick to one alternative. Having several ways of receiving payments gives the clients the freedom to choose the reliable option. At the end it will be quick for you to get the payments. Additionally, if you have something like online payment alternatives, there are high chances of you getting the money early enough than the other conventional payment alternatives.

Avoid bad clients

In business, client retention is an important aspect, but if you have customers that normally pay you late every time, it will be wise to cut ties with them. Imagine your DSO is 35 days, and a client keeps paying you after 60 days. Such individuals are enemies to your business growth; you should let them go. The long-term value of keeping a client may not be necessary, especially if the overall cost and effort required to keep them exceed the average limit.

Provide incentives and penalties

To accelerate the payment process, you can advertise discounts to those who pay early enough. To those who pay late, make them aware of the awaiting penalties. Ensuring that your invoice has the late payment penalty fee terms and conditions is advisable. Doing so will make the client aware of late payment punishment.

Final take away

If you make sales and fail to collect the money at the required time, your business will be making losses. To avoid such scenarios, you need to define your DSO. The metric will help you know how efficient your payment collection is and come up with ways to be paid quicker. Remember, when you are paid on time, you will have more funds to re-invest in your business growth. The only way to stay updated on your cash flow is by having the right tools to master the entire process.

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