Improving cash flow is a top priority for businesses. Money is needed for day to day operations, payroll, business transactions, and loans. Mastering Days Sales Outstanding (DSO) can greatly improve your business finances and help your company thrive.
You may be asking yourself, “What is DSO?” Days sales outstanding (DSO) is the average number of days that receivables remain outstanding before they are collected. It is used to determine the effectiveness of a company's credit and collection efforts in extending credit to customers, as well as its ability to collect from them. It’s hard to continue funding your own company’s growth when you’re extending your customers so much credit in the form of net-terms, so measuring your DSO is critical.
To calculate the DSO ratio take your total accounts receivable and divide it by the average sales per day.For example, if your business’ accounts receivable is $2,000 and revenue is $25,000 for the past year, your DSO is 29 days (2,000/(25,000/365)).Higher numbers mean that your business has longer collection periods. It is important to compare payment terms and average industry collection times in order to properly assess the DSO ratio and make changes accordingly.