Monitoring accounts and receivable metrics are vital to the success of your company. It lets you control your cash flow better and monitor the cash collection process. It also aids in reducing the dangers posed by unavoidable accounts with late payments. Your DSO, or Days Sales Outstanding, is one of the critical KPIs you should start tracking immediately. Your DSO is simply the length of time it takes for your company to get paid, and here is more about it.
What is days sales outstanding?
Days Sales Outstanding indicates how long it takes you, in days, to get payment from your clients. It is precisely the days between the time your invoice is issued and the time it is paid or when your company’s accounts receive the credit sales from your clients. Among other crucial KPIs to monitor in your firm, your DSO is a vital indicator of your cash conversion cycle.
Why is DSO important?
Monitoring your DSO is crucial because it’s a reliable predictor of your company’s cash flow. You can forecast the amount of cash flow you may anticipate at any given time by knowing your average collecting period. It also reveals the effectiveness of your payment terms and collection procedures, which is crucial for streamlining your accounts receivable process.
The KPIs for your DSO and receivable turnover ratio work in tandem. You can gauge the efficiency of your cash collection procedure by taking a look at both of them based on two essential factors:
- The number of days it takes to receive payment from the sale,
- The effectiveness of your procedure by contrasting your net sales with your A/R.
Your DSO can make or break your firm because it dramatically impacts your working capital. When it’s low, it means that the transition from invoicing to cash sales is going well. When it’s high, it’s a red flag for bad collecting procedures that must be fixed immediately.
A low DSO is good for you.
A low DSO is advantageous for your company! It implies that your consumers honor your payment terms, which is a good sign that they are happy with the service or item you offer. In exchange, you’ll be able to maximize your cash flow and make on-time payments to your suppliers.
Therefore, a low DSO signifies a quick cash conversion cycle and strong liquidity. Companies with low DSO can maximize their cash flow and use it strategically to finance their growth while respecting their credit policies. Investors prefer companies with a lower DSO since it indicates a good financial condition.
A high DSO is bad for you.
Your organization takes too long to collect money from its consumers if your DSO deviates too far from your payment terms or credit policy. In scale-ups and startups, the effectiveness of the sales staff and net credit sales are frequently emphasized. However, the secret to long-term growth is in your real cash collection.
A high DSO demonstrates that you essentially give your customers an interest-free loan. You can use the money to fund other projects or pay your vendors. You risk experiencing cash flow issues if your DSO exceeds your payment terms; therefore, you should find a way to fix it.