Fluctuating sales volumes can affect DSO, with any increase in sales lowering the DSO value. In general, small businesses rely more heavily on steady cash flow than large, diversified companies. Encourage customers to pay dso meaning invoices sooner by offering a discount for early payments. Offering an incentive, such as a discount for prompt payment within ten days or making upfront payments, can incentivize customers to prioritize your invoices.
Clear communication helps maintain healthy relationships while keeping them informed about their financial obligations towards your business. You can optimize DSO and refine your business strategies by combining technological efficiency with customer feedback. If your DSO is way off, it’s like realizing you’re running a different race. Aligning with industry benchmarks helps you stay on track and meet market expectations. Improved cash flow allows you to make decisions more flexibly and respond swiftly to market changes.
Challenges Associated with a High DSO
If the result is a low DSO, it means that the business takes a few days to collect its receivables. On the other hand, a high DSO means it takes more days to collect receivables. DSO is one of the three primary metrics used to calculate a company’s cash conversion cycle. Days Sales Outstanding (DSO) represents the average number of days it takes credit sales to be converted into cash or how long it takes a company to collect its account receivables.
If customers have a history of paying severely late, it could be a sign that you should stop extending payment terms to them. Not every customer is going to be the right fit, so it’s important for the health of your cash flow to identify at-risk customers early and take action to bring them back on track—or walk away. A survey by PYMNTS and American Express found that businesses that rely on manual AR processes tend to have 30% longer average days sales outstanding compared to those with medium to high levels of AR automation.
Company
Customers are either paying on time to avail of discounts, or the company is very strict on its credit policy, which may negatively affect sales performance. However, having a low DSO for small to medium-sized businesses generally carries considerable benefits. Fast credit collectability decreases problems related to paying operational expenses, and any excess money that is collected can be reinvested right away to increase future earnings.
Cash sales, in turn, are considered to have a DSO of 0, since there is no delay between the delivery of goods or services and the corresponding payment. The Days Sales Outstanding (DSO) is a working capital metric that measures the efficiency at which a company collects cash from credit purchases. Working capital is an essential metric when analyzing a company’s operational effectiveness.
