But because of the time value of money principle, time spent waiting to be paid is money lost. Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment for a sale. With effective DSO management, companies can ensure they have the cash flow necessary to invest in long-term strategies for growth and sustainability, rather than budgeting around inconsistent payment cycles.

Professional services

By calculating these DSO trends regularly, you can use them to tweak and make improvements in your business practices. To get the most out of this metric, it’s recommended to measure DSO periodically, What is Legal E-Billing rather than making changes based on individual DSO results. While DSO is generally calculated on a monthly basis, there are businesses that carry out DSO calculation on a quarterly/yearly basis as well.

• Having cash on hand also enables you to take advantage of early payment discounts from suppliers and reduces the need for external financing, which can come with high-interest costs.
• In this metaphor, the time it takes for customers to pay their tabs is akin to DSO for a business.
• A high DSO value can put a strain on your company’s cash flows, making it difficult to meet other financial obligations.
• Therefore, as the current value of money is more, the sooner it is received, the better it is.
• Join BC Krishna, CEO of Centime, to explore how AR automation can transform your collections process, improve cash management, and delight your customers.

DSO Meaning in Accounting

As you can see, it takes Devin approximately 31 days to collect cash from his customers on average. This not only incentivizes customers but also secures more cash for the business and reduces the number of invoices that need to be processed or chased on a monthly basis. If customers have a history of paying severely late, it could be a sign that you should stop extending payment terms to them. Not every customer is going to be the right fit, so it’s important for the health of your cash flow to identify at-risk customers early and take action to bring them back on track—or walk away. A consistently increasing DSO indicates that your business is headed in the wrong direction with respect to your receivables.

Offer incentives for early payments and penalties for late payments

As we’ve mentioned above, it’s ideal to keep DSO Certified Bookkeeper low to bolster financial stability and agility. However, too low a DSO may drive away customers if they feel that your credit terms are too strict. A good DSO varies by industry, but generally, a lower DSO indicates better performance. Differences in average Days Sales Outstanding (DSO) are quite visible when comparing the global markets.

Why is reducing Days Sales Outstanding important?

Let’s take a moment to remind you that you need to calculate your company’s DSO in order to see where you rank. Regardless of the method, you’re using here, it will help you get an idea of where you stand. Join the 50,000 accounts receivable professionals already getting our insights, best practices, and stories every month.

It may also signal underlying problems such as declining customer satisfaction or overly lenient credit terms offered by sales teams. In expanding on the relationship between Days Sales Outstanding (DSO) and a company’s cash flow, it’s important to understand how these two concepts interact. DSO is a measure of the average number of days that a company takes to collect revenue after a sale has been made. It is a financial ratio that illustrates how well a company’s accounts receivables are being managed.

Use an invoice template that includes your payment terms, due dates, and options

When calculating DSO, cash sales are not taken into consideration–only credit sales. In other words, it shows how well a company can collect cash from its customers. The sooner cash can be collected, the sooner this cash can be used for other operations.

It’s a metric that measures the average number of days it takes a company to collect payments on its outstanding credit sales. To calculate DSO, you divide the number of days in a period by the number of invoices that were issued during that same period. The period can be any length of time but is typically one month.For example, let’s say your company had 100 invoices in January, and it took an average of 30 days to collect payments on those invoices.

This can be annual as in the formula above, or it can be any period of time considered useful to the company. Because this is an average general KPI, though, choosing a time period that’s too low may introduce undesirable artifacts in the data. Collect data on total credit sales for the period you want to analyze (monthly, quarterly, or annually). This can be found by averaging the beginning and ending accounts receivable balances. Our system also enhances the overall customer payment experience, leading to fewer overdue invoices, and provides a secure portal for payments, reducing fraud risk. These features together accelerate revenue, streamline collections, and provide key performance insights for your team.