All you need to know about DSO
One of the most fateful tasks in a company is cash management. This concerns finances, which are a central pillar of the company's business operations. In order to better manage their receivables, and therefore their finances, companies often use an appropriate performance indicator, the Day Sales Outstanding, known as DSO. What is it in concrete terms? We detail everything here.
DSO: what is it?
The DSO corresponds to the average delay of collection or payment of receivables suffered by a company. This period runs from the date a customer invoice was issued until it is collected, whether on time or late. We can say that it is the customer delay. So, if this delay is long, the company risks disappearing. In other words, a good low DSO means that the company is in good financial health. Day Sales Outstanding is calculated in days of sales. Now, it's impotant to know how to calculate dso.
How is DSO calculated?
The calculation of DSO is done according to different approaches. But the most recognized and therefore used method is the so-called balance sheet or accounting method. This is because at the end of a company's fiscal year, financial analysts and accountants have access to the annual balance sheet data. Thus, the DSO is equal to the average payment period (DPM), which corresponds to the ratio of accounts receivable to the company's sales including VAT for 365 days. In operational terms, DSO = DPM = Accounts Receivable / Sales including VAT X 365.
How to optimize your DSO?
Being an essential lever for cash flow, every company must optimize its DSO, which should ideally be low. Because if you have a low DSO, the more you will collect your receivables and therefore your cash flow will be important. To this end, to avoid a high DSO, you must define a more or less short deadline for the payment of your customer invoices. You must therefore implement a continuous and proactive reminder policy for your customers. You must also avoid long and costly collection procedures such as factoring. To do this, you must be able to isolate and treat your disputes with your customers separately.