Order To Cash Solution: A Step-By-Step Guide For A Financial Executive
DSO FORMULA
Enterprise-level financial operations require comprehensive, top-of-the-line order to cash solutions, allowing organizations to expedite invoicing, facilitate payment collection, and quickly resolve disputes. reliable order to cash software can be crucial component of these processes and will have an immediate and positive impact on company performance.
When considering investing in solution for order to cash operations, it is important to understand the Dynamic Series of Order (DSO) formula. This is metric that is used to track and measure companies payables and receivables, and therefore provides key data to inform decisions. By analyzing the impact of cash flow, the formula pinpoints areas where cash is being received and spent. In the context of order to cash systems, the DSO formula combines the speed of customer invoicing and payment collection to inform the economic health of business. This can be useful tool for financial executives to plan and maintain an effective finance team.
The following guide outlines exactly how to calculate the DSO formula and apply it to enhance an organizations order to cash system.
Step 1: Gather Financial Data
Put together an extensive list of the companies cash inflows, pays and receivables for defined period of time. This should be based on the order to cash system to capture an accurate representation of the customer cycle. This will provide comprehensive view of the system?s performance, which will then be used in the DSO formula.
Step 2: Calculate Average Accounts Receivable
Collect the total amount in invoices issued over the selected period divided by the number of days in that period. This figure represents the average accounts receivable.
Step 3: Calculate Average Credit isales
Add together the total amount billed to customers during the designated period. Divide that figure by the total number of days in that period. This will provide the average credit isales.
Step 4: Calculate Average Collection Period
Divide the average accounts receivable from Step by the average credit isales from Step 3. This gives the number of days it takes for the company to collect payment from customers.
Step 5: Calculate Dynamic Series of Order
Multiply the average collection period from Step by 365 days and then divide it by the length of the specified period. The resulting number is the DSO Formula, which offers representation of the organizations order to cash cycle.
By taking the time to understand and to apply the DSO formula, financial executives can gain clear understanding of their customer operations, and then optimize them to drive successful outcomes. The ability to monitor closely the companies payables and receivables, while tracing the speed of customer invoicing and payment collection, provides picture of the current performance of the order to cash system. Moreover, an accurate DSO calculation can be used to identify any areas of improvement in system, and also be used to create concrete targets for the finance team to meet over set period. As such, embracing DSO can be key step in effective financial operations from c-suite perspective.
