How well do you know customers’ payment habits? Are you waiting longer than you should for payments to come through? Your Days Sales Outstanding (DSO) can help provide answers.
DSO is a key indicator of your AR health. It measures the average number of days that invoices are outstanding. Reducing the days your open invoices are unpaid can dramatically increase your company’s cash flow.
What is DSO?
Days Sales Outstanding measures the average length of time between the date an invoice is created, and the date it’s paid. The lower it is, the faster you are collecting on your invoices and the more cash you have on hand to run your business. This is calculated monthly in your FG Receivables Manager. Go to the AR Analytics dashboard in your FG Reports to see how your company is doing.
Keep in mind that because the formula for DSO includes credit sales, it will reflect any surge or drop in sales over the month. If you have a few large sales but you AR remains the same your Days Sales Outstanding will appear lower even though no progress was made in collecting on your delinquent AR.
Why is DSO important?
DSO is a good catchall metric for your general AR health. It accounts for both the on-time payments received and overdue AR. Ideally it is within 10-15 days of your net terms. If this number is growing each month, it’s time to ramp up your follow up with calls and email reminders.
How to reduce DSO?
- Get your customers to pay faster! The easiest way is by sending out consistent, systematic payment reminders so that unpaid invoices don’t slip through the cracks and customers are held accountable.
- Don’t just send an email, give your customer a call. A conversation not only a great opportunity to make sure that emails are going to the right contact, but the personal touch can help strengthen your business relationship and increase the likelihood of getting paid.
- Adjust your net terms. The more generous your payment terms are, the longer your invoices will remain unpaid. When possible, setting your net terms for 30 or 15 days will dramatically reduce your Days Sales Outstanding.
- Make it easy for your customers to pay. Offer multiple payment options and clearly state remittance details on your invoices and reminders.