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How to Improve DSO: Calculation Formula and Best Practices

Topics: Finance, Cash Flow & Working Capital, Management

DSO stands for “days sales outstanding,” which is a measure of the number of days it takes accounts receivable to collect cash from outstanding invoices. In other words, how quickly are customers paying their invoices on average? DSO doesn't measure against one customer. Instead, it takes the measure of all outstanding invoices.

DSO Calculation Formula

(Ending Total Receivables / Total Credit Sales) x Number of Days in Period

Ending Total Receivables is the accounts receivable balance. 

Total Credit Sales is the dollar value of outstanding invoices.

Here is an example of the DSO calculation formula in practice:

Let's say total receivables for the second quarter were $10,000 and total credit sales were $18,000. The second quarter had 91 days. 

The calculation is as follows: ($10,000 / $18,000) x 91 = 50.5 days DSO. 

This means it takes 50.5 days on average to convert accounts receivable into cash. 

When choosing a period (i.e. Number of Days in Period) to calculate DSO, it's important to choose a meaningful sample size. One month may not be enough. Quarterly and annually usually work well. Quarterly is useful for shorter time frames. 

For example, what does the recent DSO trend look like? This can tell you if recent efforts to improve DSO are working. Annual periods can be done in addition to quarterly. Annual periods allow you to see long-term trends in DSO.

What is a "Good" DSO 

Good DSO is dependent on other companies within the same industry. To get an idea of overall DSO across many industries, CFO Magazine reported the average DSO for a range of 49 industries between 2020 and 2021. 

Keep in mind that the average days sales outstanding will be different depending on your specific industry's numbers. 

Is a High DSO Bad? 

If your competitors have lower DSOs, then yes - a high DSO can signify an issue with your collection process. For some industries, a high DSO is a part of doing business in that industry. Usually, a high DSO ranges from 66 to 125 days. A 2022 report from Dun & Bradstreet reported that the industries with the highest DSO are publishing and construction. 

What does a company's DSO say about its accounts receivable collections practices? 

A high DSO, especially one that is trending up, shows that a company is taking a long time to collect its receivables and the process is not getting any better. The company can't use cash that is tied up in its receivables. In this scenario, it's not uncommon for working capital to decrease more rapidly than cash is coming in, leading to a cash flow crunch. Also, if you have to send some invoices to collection agencies, that will add more time to your DSO.

A too-low DSO means the company's collection policy may be too stringent. In fact, the company may be unknowingly turning away customers because of its credit policy

DSO Best Practices: How to track DSO performance

DSO shows your receivable's efficiency and should be part of any KPI dashboard. Tracking both quarterly and annual DSO over time will reveal a trend. 

Quarterly DSO will show a change in trend much faster than annual tracking. However, it's important to track both so you can see what short-term and long-term trends are doing.

You can track DSO manually through spreadsheets, or by using your accounting software, which may offer reports that graph DSO trends.

How to improve DSO in 3 Steps 

Improving DSO is all about improving your credit and collections policies. If you recognize that you have a high DSO and want to bring it down, there are a few things you can try. 

  1. Start calling customers who are late with their payments. These calls should be regular, with multiple calls going to each customer.  You want to remind your customers that they have an overdue payment, and mention that a late penalty will be incurred if they don't pay by X date. You can also say that the last incurred late fee will be removed if they pay now over the phone.

  2. Consider whether you’re tailoring to the customer instead of what's best for your company. If the average DSO in your industry is 45 days and your DSO is 60, are you able to justify financing customers for 15 days? If you have higher sales because customers are given longer to pay, then everything may be fine. But if you are having a difficult time paying suppliers because you're always short on cash, then it's time to rethink net terms for invoices.

  3. You can improve DSO by automating your accounts receivable. Automation removes much of the human intervention and errors that go along with it. The end result is a great improvement in efficiency and a reduction in costs.

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Improve DSO with Industry-Standard Best Practices

  • DSO is a calculation of the number of days a company takes to collect payment from outstanding invoices.
  • A good DSO depends on the industry average compared to the other companies in the same industry. 
  • Automating your accounts receivable can be a great way to improve your cash flow and lower your DSO.

Are you looking for a way to automate your B2B company's DSO and increase cash flow? Apruve can help. With Apruve, you can easily automate your days sales outstanding by extending risk-free credit to your customers, while Apruve ensures you get paid within days. Learn more about Apruve's credit network or contact Apruve’s specialists to sign up for a demo today!

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