Running a business is bitter sweet. Business owners and entrepreneurs have the opportunity to be their own bosses and make their own schedules while also doing something they are truly passionate about. However, no one said running a business was easy; it is also hard work.
There are a number of nuances to running a business, such as strategic planning, dealing with customers, and even trying to get paid. In fact, the majority of business owners will likely agree that one of the worst things about running a business is trying to get paid.
This begs the questions of how well you know your customers’ payment habits. Are you waiting too long to receive customer payments? Do you have unpaid invoices that are hurting your net sales? One way to better track customer payment habits and your overall sales is to track your Days Sales Outstanding (DSO).
What is Days Sales Outstanding (DSO)?
Days Sales Outstanding or DSO measures the average length of time between when an invoice is issued and when the customer pays. This data is a key indicator of your business’ Accounts Receivable position and health.
Although there are a number of DSO tracking resources available to help business owners manage their cash flow, DSO is calculated by using the following formula:
DSO = AR x Number of Days / Credit Sales for Period
This formula involves credit sales, which means the numeric results can vary based on the fluctuation in sales each month. For example, if you have several months with strong sales, and AR remains the same, then your DSO will appear lower even if AR collections were fewer.
Why is DSO important?
DSO is typically calculated on a monthly basis. The administrative or financial analyst teams in your business will run reports to see how well your company is performing financially and calculate overall AR and financial health.
Tracking DSO provides business owners with insights on the average number of days invoices are outstanding. Having this data and information readily available can help business owners dramatically improve the company’s cash flow.
All in all, DSO is a great performance metric to track your general AR health. DSO accounts for both on-time payments received as well as overdue payments.
How to Reduce DSO
If your DSO “bottom line” increases each month, then it might be time to make more follow up calls and send more email reminders to try and collect outstanding invoices.
Additionally, here are some other tactics you can try to ensure that you get paid:
- Give your customers a call. Email reminders are great, but sometimes giving them a call is better. Calling them will not only give you the opportunity to maintain existing customer relationships and giving them a personal touch, it’s also a great way to follow up on outstanding invoices to make sure you get paid.
- Adjust your net terms. If you notice your DSO bottom line getting worse, then it might be time to look at why. Perhaps your current net terms are too difficult for customers to meet. Consider adjusting your payment terms. Try setting your net terms for 30 or 15 days to dramatically improve your DSO.
- Make it easy for your customers to pay. Sometimes offering multiple payment options for customers and clearly stating payment details will increase your chances of getting paid on time. Be sure thesepayment options, policies, and details are clearly stated on your invoices.
- Consistent follow ups. The easiest way is by sending out consistent, systematic payment reminders so that unpaid invoices don’t slip through the cracks and customers are held accountable.
All in all, you don’t have to be an accountant or a financial analyst to understand how DSO works and reap the benefits that go with it. Most companies have an administrative or bookkeeping team to analyze this data. However, if you are a solo-preneur, you can easily implement DSO analytics software which will track your DSO for you.
In summary, tracking your DSO will not only give you a better picture of your company’s overall financial and AR health, it will also help you to learn your customers’ payment behaviors. These insights and data will enable you to adjust your payment options and terms to increase your chances of customers paying on time.