Business owners should not ignore the impact of DSO (Days Sales Outstanding). DSO measures how long it takes for a company to receive payment for its products or services. A high DSO can negatively impact your business’s cash flow, making it difficult to pay your bills on time, reinvest in your operations, or take advantage of new opportunities. Let's take a closer look at how DSO can affect your business and explore some strategies to improve it.
Understanding DSO
DSO is a calculation that tracks the length of time it takes for your business to collect payment for your goods or services. It’s calculated by dividing your accounts receivable balance by your average daily sales. For example, if your accounts receivable balance is $50,000 and your average daily sales are $2,000, your DSO is 25 days. A lower DSO is better because it means that you’re collecting payment more quickly.
The Impact of High DSO
A high DSO can have a variety of negative effects on your business. First, it can hurt your cash flow. If you have a lot of outstanding invoices, it can create a gap between the time that you’ve delivered your products or services and the time that you get paid for them. This can make it difficult to cover your expenses, pay your suppliers, or invest in your business. High DSO can also lead to an increase in bad debt write-offs, since the longer an invoice remains unpaid, the more likely it is that it will become uncollectible.
Strategies to Improve DSO
There are a few strategies that businesses can use to improve their DSO. One is to offer incentives for customers to pay their invoices more quickly. For example, you could offer a discount for customers who pay within 10 days of receiving their bill. Another strategy is to make it as easy as possible for customers to pay their invoices. This might include accepting online payments or setting up automatic billing. Creating automated reminders for your customers can help remind them when it’s time to pay.
Leveraging Technology
One of the most powerful tools for improving your DSO is technology. There are a variety of solutions available that can help you manage your accounts receivable more effectively. For example, Bill360 can help you create and send invoices in just seconds, create automated reminders and track how your customer is via the customer portal or through our easy-to-use dashboard interface.
DSO is an important metric for business owners to track because it directly impacts cash flow. High DSO can create a variety of problems for your business, including difficulty paying your bills or investing in your operations. However, by understanding your DSO, implementing strategies to improve it, and leveraging technology tools, you can help ensure that your business is collecting payment as quickly as possible. If you’re struggling with DSO, there are steps to help your business get on the fast track to cash flow.
