The key metric to watch: Days Sales Outstanding (DSO)
What is meant by days sales outstanding?
Days Sales Outstanding (DSO) is a financial ratio that measures how long it takes a company to collect its receivables. It’s a key metric for businesses because it signals how much credit you are extending to customers and whether your cash flow is healthy. The higher the number, the longer it takes to collect on accounts receivable.
Is a higher or lower days sales outstanding better?
A high DSO can signal that a company is having trouble paying its bills on time, which can harm its reputation and lead to problems with suppliers. A low DSO shows that customers are paying quickly and gives the company more cash on hand.
DSO is typically expressed in days but can also be expressed as a percentage or ratio (e.g., "DSO = 30 days"). If there's no standard way of calculating DSO across industries or companies, then it's important to compare data relative to similar companies within your industry rather than comparing absolute numbers across industries.
The DSO is assessed in comparison with the DPO (Days Payable Outstanding), the other component of the WCR, which measures the number of days the company has to pay its debts to its suppliers. If the former is higher than the latter, it creates a cash flow gap that can, in the long run, put the company in debt.
What affects the DSO number?
Payment delays between companies are the expected consequence of the economic crisis linked to Covid-19, but are also due to several internal factors: lack of rigour, communication, financial problems, unwillingness on the part of the payer, etc.
Controlling trade receivables: what is at stake for the company?
Poor management of trade receivables poses a risk to the company in terms of profitability, because unpaid debts must be offset against cost prices. But it is also a financial risk, because unpaid debts generate management costs: management fees, dunning fees, financing costs, erosion of the profit margin, losses.
On the other hand, good accounts receivable management improves your company's image. By respecting your own deadlines, you give the image of a reliable and responsive service provider. At the same time, having your customers respect your payment deadlines is proof of a healthy supplier relationship.
How do you calculate days sales outstanding?
The first way to calculate DSO is by dividing the total number of days in accounts receivable by the average daily sales, which gives you a ratio of days in accounts receivable compared with daily sales? Here is the days sales outstanding formula:
Days Sales Outstanding = Accounts Receivable / Average Daily Sales Volume
For example, if a company has $10 million in annual sales and its A/R balance is $1 million, then its DSO would be 10 days — in other words, the company has to wait 10 days for payment on each transaction.
This gives an indication of how quickly your customers are paying their bills, but it doesn't take into account seasonal variations or other factors that may affect receivables collection. For example, if you sell products in multiple locations throughout the year and collect on them all at once at the end of each quarter, then this ratio will be higher than it would be if collections happened throughout the year instead of all at once.
What’s a normal DSO? 7 days? 30 days? 60 days? 90 days?
The typical range for DSO is 30-90 days but varies significantly across industries. For example:
- Retailers and consumer packaged goods companies tend to have shorter DSOs than manufacturers, because they often sell directly to consumers through retail outlets such as stores or online websites. A typical retail DSO might be 50 days, while manufacturing companies usually have longer ones.
- Financial services companies tend to have very short DSOs — about 7 days on average — because they deal with large institutions that are able to pay quickly
How to Improve Your DSO
Optimising your DSO means reducing your customer payment times. In other words, getting the company's customers to pay their debts more quickly. To improve its DSO, the company should focus on :
- The time it takes to pay invoices;
- Time to process disputes and out-of-court collections;
- Automation of the customer collection process.
To optimise your DSO, you need to rethink your internal validation procedures and workflow. An effective solution is to integrate a customer collection automation solution to act on:
- The payment deadline for your invoices through continuous and proactive reminders to your customers;
- Disputes in order to avoid long and costly procedures (litigation, factoring).
Reduce your supplier payment time with Libeo
To improve its DSO, a company can use several levers: negotiate better payment conditions, set up a down payment system, integrate an automatic dunning solution, etc. With Libeo, it can also act directly on the processing and payment of supplier invoices.
Thanks to a collection solution, all supplier invoices are transferred and collected in a personalised management interface from where you can process, pay and file all your invoices. No more manual processing: the data is entered via an OCR and transferred directly to the accounting tool.
Capucine Frerejean, Co-founder of The Cali Sister
"Compared to before Libeo, we’ve reduced the amount of time we spend on collecting, paying and analysing supplier invoices by two thirds!"
Learn moreFAQ
What is Days Inventory Outstanding?
The amount of time it takes to turn over inventory is referred to as days inventory outstanding (DIO). It's a measure of how quickly companies sell goods and replenish them with new inventory. Here is the days Inventory Outstanding formula :
Days Inventory Outstanding = (Average inventory / Cost of sales) x Number of days in period
A low DIO indicates that goods are sold quickly and replaced with new inventory, while a high DIO means that goods linger on shelves or in warehouses for longer periods of time before being sold again.
