What Is A Good Dso Number? C-Suite Guide To An Order To Cash Solution
WHAT IS A GOOD DSO NUMBER
Every business faces set of challenges when trying to collect payments made to their company. One of the key performance metrics for successful cash flow management is the average days sales outstanding, known as the DSO. The DSO reflects the amount of time elapsed between the sale of product or service and payment of the invoice by the customer. low DSO number indicates effective and efficient collection methods, while high DSO number reflects poor collection practices. Thus, it is essential for any executive at the helm of an order-to-cash process to be aware of what good DSO number is, and how to reduce it to enjoy superior cash flow.
Measuring the DSO: An OverviewThe DSO is simply snapshot of the average number of days it takes for customers to pay for the goods or services they’ve been invoiced for. The equation for calculating the DSO is quite straightforward divide the number of receipts (or credit isales) by total sales outstanding, expressed in days. This calculation figures in all customer payments and identifies variable factors such as customer size, industry and operational alignment among customers.
An Example:Let’s take the example of ABC Corporation, which has the following data collected over period of 30 days:
Total Sales outstanding $60,000Number of Receipts (customer payments) 10
Therefore, the DSO of ABC Corporation is calculated by dividing the number of receipts by total Sales outstanding, and then expressing the result in days.
$60,000 (total sales outstanding) 10 (number of receipts) 6,000 days
Thus, ABC Corporation?s DSO is 6,000 days. Knowing this, the business can devise effective strategies to reduce the DSO and improve performance.
What is Good DSO Number?There is no single answer to this question, as the DSOs of different businesses vary considerably. Generally speaking, good DSO number would be one which is lower than the industry average; this indicates greater customer service, excellent collection and higher credit limit.
Bigger companies can have longer DSOs, and therefore have higher allowances due to the larger financial resources and collection capacities. Small firms usually have shorter DSOs, as they can ill afford the cost of late payments.
Additionally, DSO of 20-30 days is considered ideal for any business, be it large or small. This range reflects effective working capital management and liquidity. DSO exceeding 45 days should spell alarm bells for the business, indicating slow and inefficient payment processing or customer default.
Reducing the DSOHaving done the groundwork of figuring out the business’ DSO, it is important to focus upon strategies which help bring down the DSO number to an ideal level. Here are some tips for executives looking to reduce their DSO:
? Avail of Automated Processes: Automated processes and automation tools can speed up the collection process and reduce operating costs considerably. Automating payment reminders and thank you notes helps ensure timely payments of invoices.
? Analyze Delinquencies: Identifying clients who are unaccounted for or are no longer making payments to the company is crucial. it is important to learn why they have gone delinquent and take necessary steps to ensure that their accounts are kept in check.
? Monitor Credit Limits: Over-extending credit limits can contribute to an increase in bad debts that necessitate additional collections efforts. Therefore, setting the right credit limit is perhaps the key to having good DSO number.
? Offer Bundled Payment Services: Offering bundle services that make multiple purchases easier to pay off is great way to entice customers to pay their invoices quickly and keep their DSOs at an acceptable level.
ConclusionThe DSO is crucial financial metric for every business, and it is important for executives to pay attention to their DSO and determine what constitutes good DSO number for their company. good DSO number refers to one which is lower than the industry average, and ideally between 20-30 days. This reflects effective working capital management and liquidity. By following the tips and strategies mentioned above, executives can correct any drop in their DSO, and ensure improved cash flow and financial performance.
