Tracking the Daily sales outstanding (DSO) is important for seeing how well your AR and collections processes are going. Monitoring DSO and improving its metrics allows ensuring smooth cash flow in business thereby enabling growth and fulfillment of obligations.

A Guide to Managing Daily Sales Outstanding

Managing a company’s accounts receivable is a crucial part of keeping its finances in check. Days Sales Outstanding (DSO) is an essential financial indicator that helps assess how well a company collects payments from its customers. High DSO can hurt your cash flow and working capital, but the good news is that there are methods to help reduce it. In this article, we will provide a brief guide to effectively managing your receivables and reducing your DSO, using best practices and tools like Versa Cloud ERP.

What Is Days Sales Outstanding (DSO)?

Days sales outstanding DSO can also be defined as the average time a company that has made credit sales expects to receive payment for the sale. This explains the general trend of most companies finding it hard to collect debts in the shortest time because of the higher DSO.

DSO is very important in the entire lifecycle of a particular order commencing from order placement to payment collection. Further, it is also a component of the cash conversion cycle(CCC) – described by quantifying the time lag from the purchase of goods to cash receipts from customers against those goods.

DPO vs. DSO

While DSO measures how long it takes for a company to collect payments from its customers, Days Payable Outstanding (DPO) tracks how long it takes to pay off suppliers. Understanding both metrics helps businesses monitor their cash flow and financial health.

How can a Business Calculate Daily Sales Outstanding (DSO)

DSO is calculated using this formula:

DSO = (Average Accounts Receivables/Total Credit Sales) × Number of Days in Period

Example: If a company has an average AR of $50,000 and credit sales of $280,000 over a 90-day period, its DSO would be 16 days.

Keep in mind that DSO can fluctuate, so it’s a good idea to look at this metric over a 6-month period to get a more accurate picture of your receivables performance.

Why Reducing Daily Sales Outstanding (DSO) Matters

If trades encourage the reduction of DSO key creditors day, it will be possible to help improve a business’s cash collection cycle (turnover), minimize bad debt risk exposure, and ensure the adequate amount of cash to run the business is available. Collection of receivables due from customers is usually done faster which means that cash is accessed faster reducing the working capital requirement (WCR) of the firm and increasing the financial flexibility of the firm.

Optimizing Your Days Sales Outstanding (DSO) with Versa Cloud ERP: Actionable Strategies for Healthy Cash Flow

As an enterprise gets financed or offers in credit terms, it is essential to manage repayment terms relative to sale value against the DSO to track precisely when their customers make payments. It is prudent to ensure that a customer’s payment does not take too long if the company wishes to remain relatively cash-positive. On the other hand, timely payments encourage business activities aimed at profits while on the contrary; delayed payments tend to increase the DSO finally leads to cash shortages.

1. Appoint a Manager for the DSO process

To keep DSO under control, appoint someone to manage the order-to-cash process. This could be a credit manager or another finance team member who will be responsible for implementing strategies to improve the collection of payments.

2. Define Key Indicators

Don’t just focus on DSO. Several other indicators can help you analyze collection performance more effectively, such as Best Possible DSO (BP DSO) and DSO Due. These indicators give a more comprehensive view of your payment collections, especially for current invoices and seasonal variations.

3. Set Clear Objectives

Set specific goals for reducing DSO, like aiming for a 10% reduction within six months. Breaking this down into smaller, measurable sub-objectives will make the overall goal easier to achieve.

4. Understand Your Market and Customers

Understanding the market in which you operate and the financial health of your customers is crucial. Some markets may have seasonal trends that impact payment timelines. Regularly analyzing your customer portfolio can help identify potential risks early.

5. Target the Front End

The goal isn’t just about collecting unpaid invoices; it’s about managing the period between when the customer places an order and the invoice due date. Train your sales team to understand payment terms and consider offering customers early payment discounts or flexible terms. Versa Cloud ERP allows automation of these processes, helping you stay ahead.

6. Automate Invoicing and Reminders

Automation is key to efficient receivables management. Using an all-in-one ERP solution with robust accounting and payables/receivables managing features like Versa Cloud ERP, you can send invoices and reminders automatically. Automated reminders ensure that customers don’t forget payments, improving your cash flow without damaging customer relationships.

7. Set Up a Process for Non-Payment

Always have a clear process in place in case of non-payment. This could involve actions like sending registered letters, escalating communication, or even using a collection agency. Communicate regularly with customers and try to work together to solve payment delays.

8. Digitize the Order-to-Cash Process

With Versa Cloud ERP, you can centralize and review all your customer information, invoice status, and payment history in one place. This gives you better visibility into payment patterns and reduces errors in invoicing, making it easier to manage collections.

9. Centralize Your Data

Managing all your data in one tool simplifies the tracking of invoices, payments, and collections. Versa Cloud ERP allows you to view reports that highlight outstanding payments and customers at risk. In addition, the interactive dashboard allows users to add widgets that provide visibility on the receivables details. This helps prioritize follow-ups and actions.

10. Regular Reporting

It’s important to regularly review and report on your DSO and accounts receivable status. By using tools like Versa Cloud ERP, you can track the monthly progress and adjust your strategy if needed. Share these reports with your finance and sales teams to ensure everyone is aligned on receivables management.

What Is a Good or Bad Daily Sales Outstanding (DSO)?

A DSO under 45 days is typically considered good, but this varies by industry and payment terms. Tracking DSO trends over time is essential—improvements or deteriorations in DSO provide insights into operational efficiency and customer payment behaviors.

Benefits of Tracking Daily Sales Outstanding:

Boost collection efficiency: Identify and address late-paying customers.
Improve customer relationships: Understand why customers delay payments—whether due to financial trouble or dissatisfaction with your service.
Strengthen cash flow: Lower DSO leads to improved liquidity, allowing for more growth and investment.

Key Takeaways:

DSO reveals customer payment habits.
A high DSO signals the need to evaluate customer payment trends and collection processes.
Maintaining a healthy DSO helps ensure consistent cash flow.

Conclusion

Reducing DSO and improving receivables management is crucial for maintaining a healthy cash flow and ensuring financial stability. Versa Cloud ERP provides a powerful platform to help automate and optimize this process. Leveraging the advanced features of Versa Cloud ERP can streamline these processes, helping businesses lower DSO and boost financial health.

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