Measuring The Efficiency Of An Order To Cash Process With Define Dso
Define Dso
Measuring the efficiency of an operational process is of paramount importance to executives in Finance, especially with regard to their Order to Cash flows. Define DSO (Days Sales Outstanding) is an analytical tool leveraged to gain insights into the financial performance of the process. As KPI (Key Performance Indicator) of cash flow, OTC’s Define DSO score allows executives to optimize their accounts receivable and improve their sales cycle.
Developed by the National Association for Accounts Receivable Professionals, Define DSO is standard measure of calculating how long it takes to receive payments from customers after receiving sales orders. This metric is useful in determining the efficiency and health of companies financial operations. By understanding the average Define DSO of companies OTC process, executives can take decisive action to improve it.
Part 1: Calculating Define DSO
In general, the calculation of Define DSO involves taking the average number of days within which an outstanding receivable is paid. This is determined by dividing the companies total accounts receivable (AR) at the end of specific time period by the total revenue generated during that period, multiplied by the number of days.
In particular, Define DSO starts by gathering the total amount of money currently in circulation: that is, the money owed to and by the company, divided by the total of ?money in? (the sum of sales and cash receipts), and multiplying that figure by the average number of days it takes to pay given payment.
AR/ Sales Cash Received/ Number of Days)
For example, if companies “money out” (A/R) is $100,000 and the total money in (sales+cash received) for the same period was $200,000, and the average number of days for payment was 30, then the DSO would be calculated as such:
$100,000/ ($200,000/ 30) 15 days
With an average of 15 days, that companies Define DSO would be 15 days.
Part 2: Using the Define DSO Metric
Once executives have determined and calculated the DSO of their OTC process, they can use this metric to monitor the efficiency and performance of their OTC operations.
Generally speaking, longer DSO indicates inefficient management of receivables. The longer it takes for customers to pay their invoices, the slower the cash flow and the more difficult it is for the company to manage its liabilities.
Conversely, lower DSO number would indicate faster cash flow and better performance from the organizations OTC process. DSO of 30 days or less is generally considered reasonable and indicates that the system is running smoothly.
Part 3: Taking Action
Once the Define DSO metric has been calculated, executives can take action to improve their process and cash flow.
Here are some examples of steps that can be taken to reduce the average Define DSO:
? Automate Accounts Receivable Tracking: Use technology such as cloud-based accounts receivable software to track payments more efficiently.
? Speed up Invoice Payments: Offer incentives to customers to encourage prompt payment of invoices.
? Reduce Outstanding Balances: Streamline the collection process and work with customers to reduce their outstanding balances.
? Strengthen Credit Control Systems: Put in place credit control systems that reduce the risk of lost or delayed payments.
Conclusion
Ultimately, Define DSO is valuable metric for executives to analyze and monitor their Order to Cash process. By calculating and utilizing the DSO, executives can gain valuable insights into their cash flow and take action to improve their system?s efficiency.
