If you’re a business owner or executive, you probably hear a lot about dso and bad debt. But what is DSO, and why does it matter? Days sales outstanding is a measurement of the payment collection period, or the number of days it takes for a business to receive payment on money owed. Therefore, DSO is considered a highly reliable metric for measuring cash flow and the health of your finances. For example, if your business has a consistently high DSO (monthly, quarterly, etc.), you’re probably not receiving payments on time and have a higher likelihood of bad debt.
Cash flow is critical for all day-to-day business functions as well as growth and scale, so it’s critical to monitor your days sales outstanding and make adjustments to your credit approval and collections process accordingly. Let’s dive into three ways you can take control of your DSO to increase cash flow and grow your business.
Know Your DSO Number
The first step in monitoring and improving your days sales outstanding is determining where you currently stand. To calculate this, divide your total accounts receivable by total credit sales and multiply by the number of days of the given period (see below).
Once you’ve determined your DSO, compare it to the market. Generally speaking, a good benchmark is 35-45 days, but this can vary wildly by industry. For example, the management consulting and energy industries typically have high DSO, sitting at over 100 days. Make sure you are benchmarking yourself against competitors to get a true picture of where you sit in the market.
Assess Your Processes
The next step in taking control of your DSO is assessing your credit decisioning, monitoring, and collections processes. Even if your current DSO number is strong, you should take time to assess your internal processes and recognize where potential cash flow obstacles may occur in the future.
- Credit decisioning. Is your credit decisioning process data-driven, efficient, and accurate? Your cash flow process starts with your credit approval workflow. Take a look at historical data and the accuracy and predictability of your credit decisioning. Are you missing risk indicators from the start? How many times does that oversight occur?
- Credit Monitoring. Many businesses do not have an effective credit monitoring process that can alert your team of potential delinquencies or client behavior changes. Developing a proactive credit risk monitoring process is a key facet of optimizing your days sales outstanding.
- Credit Collections. Perhaps most importantly, assess your credit collections
process to identify gaps in communication or efficiency. Consider whether your
clients are being notified of payment due dates in a timely manner and how quickly delinquencies are flagged and prioritized.
The most effective, efficient method for taking control of your days sales outstanding is to automate your credit decisioning, monitoring, and collections processes. By investing in credit risk management software, you can bridge critical efficiency and communications gaps between your team, your clients, and ultimately improve your cash flow.
With Creditpoint Software, our clients have improved productivity by 10x and saved millions in bad debt reduction. If you’re considering automating your credit management processes, we’ve developed an Official Guide to choosing the best software to meet your unique business needs.
If you’re ready to take control of your DSO, Creditpoint’s automated software can transform your business. Schedule a consultation with CreditPoint Software to learn how you can leverage the efficiency and risk-reduction benefits of an optimized software solution.