The DSO, a key performance indicator!
In the world of business and finance, performance indicators are essential to measure the financial health of a company. One of these key indicators is DSO (Days Sales Outstanding), closely linked to payment terms and average debt collection time. DSO is considered an essential indicator to determine the effectiveness of the cash collection process within an organization.
What information does the DSO provide?
It communicates to you the number of days of turnover that you have outside your bank account: your sales and therefore your invoices not yet paid by your customers translated into number of days. It is the flagship performance indicator of credit management.
But then how to calculate it?
The most common method is called the so-called exhaustion method. What an absolute motivation to work on the indicator, the flagship ratio of the receivables, speaking of exhaustion.
Let's forget these awkward words to fully understand the mechanism: the DSO calculation method by depletion or "Count back" consists of subtracting from the financial outstanding, until it is depleted, the turnover including tax for each month and adding the number of days of each of the corresponding months.
Read the full tutorial about that topic: How to calculate the DSO?
Low DSO: Companies with a low DSO (less than 30 days) can be considered to have good control of their cash flow and customer credit.
High DSO: A high DSO (beyond 60 days) may indicate that the business is having difficulty collecting invoices from customers, which may lead to cash flow issues.
Why is DSO important?
Improved credit risk management
By regularly monitoring and analyzing DSO, businesses can quickly identify trends and potential issues related to debt collection and payment terms granted to customers. This allows managers to adapt their credit policies based on identified risks, thereby minimizing the company's exposure to default or non-payment risk.
Cash flow optimization
Cashflow optimization is crucial for the smooth running of a business. Proper monitoring of DSO can help identify areas where improvements can be made to reduce invoice collection time and improve cash management. A company with better cash flow is more likely to succeed in the long term.
Help in making strategic decisions
The DSO can also serve as a tool to evaluate the effectiveness of internal company processes and provide valuable information for making strategic decisions. For example, it can help business executives decide whether certain credit terms need to be changed or whether additional effort should be devoted to cash collection.
Can I have a DSO in real time, by customer, by branch, by BU, by entity…?
Yes and effortlessly to calculate it ! In order to focus your energy only on improving it.
My DSO Manager brings you online, in real time, your DSO at the expected level with the detail per customer to give you the best readability of an indicator whose quality of management ensures your cash performance.
Our cash collection software allows you to go back in time over a period of one year with a monthly or weekly rhythm to better understand your variations and your evolution.
Don't wait any longer to make Days Sales Outstanding your performance indicator!