The DSO, Days Sales Outstanding

DSOThe DSO is the flagship performance indicator in trade receivables and credit management.

It is the number of days of turnover invoiced and not cashed in yet. It is not the average customer payment time even if this affects the result. In fact, the faster customers pay, the lower is the DSO.

The objective is for this indicator expressed in number of days to be as low as possible. For example, a 30-day DSO indicates that turnover is collected relatively quickly, which is essential to optimize Working Capital Requirements and cash flow. On the contrary, a 120-day DSO reveals significant delays before receipt of revenue.
A high DSO degrades the financial situation of the company, generates cash flow pressures and decreases profitability due to the financial costs incurred and unpaid debts.
The more time passes, the lower the probability of recovery. The DSO has therefore an impact on the result in addition to the cash flow.

What are the components of the DSO?

The DSO relates to the turnover achieved and the amount of outstanding receivable at the time the calculation is made.

It thus depends on the payment period granted to its customers and therefore on the commercial policy practiced. The second factor that influences it is the amount of late payments.

How to improve the DSO?

The areas for improvement relate primarily to short payment terms granted to customers. Obtaining advance payments on order also reduces the average payment period granted. It is essential to establish short standard payment terms (from 10 to 30 days) and to increase them only during the commercial negotiation if this is essential, by obtaining a counterpart (for example a deposit, a quarterly invoicing, etc. …).

The second axis is to optimize cash collection. An optimum collection management will reduce payment delays and will allow to get payment as close as possible to the due dates of invoices. Here the payment method used comes in. Some payment methods allow to mitigate risk of late payments (SEPA direct debit, L/C, etc.) and should be preferred.

Sometimes a customer does not want to pay because he has a good reason to do so: the invoice does not respect the requested formalism, the equipment does not work or does not correspond to the order, etc. There are plenty of "good" reasons not to pay depending on the type of activity. These disputes must be dealt with as quickly as possible. In fact, meeting customer expectations allows both to obtain payment quickly and to maintain, and even improve, customer satisfaction.

To be paid quickly and well, it is also essential to assess the creditworthiness of your customers before the sale, then throughout the business relationship. This customer risk management makes it possible to detect a customer experiencing financial difficulties and to adapt the terms of payment or the contract to limit the risk of non-payment. The use of one or several security tools available (credit insurance, bank guarantee, documentary credit, etc.) will allow the sale to be made while preventing customer risk.

A relevant performance indicator

The DSO is the result of several factors which provide opportunities for improvement. Its optimization involves in-depth work on the company's processes in terms of standard payment terms and means, contractual clauses, customer risk monitoring, quality of debt collection, etc.

It is relevant to break down the DSO by customer groups, by customer or other type of segmentation suited to your business. This approach highlights the customers or activities whose DSO needs to be improved. For this, the use of software such as My DSO Manager is essential.

The solution calculates in real time and on an unlimited number of perimeters the DSO and its components: the contractual DSO and the late DSO. So you can understand in just a few clicks where improvement efforts should be focused.
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