It is a commonly used measure for the invoicing collection process. Investopedia defines DSO as “A measure of the average number of days that a company takes to collect revenue after a sale has been made”. If you are strictly a cash business your DSO will be 0. If you generate invoices for your customers and give them credit terms (some number of days before they are supposed to pay) then you will will have an accounts receivable balance and thus a DSO . You can use the DSO number to measure the efficiency of your collections. Since DSO is so popular you can also use it as a gauge against other companies in your industry.

Calculating your Days Sales Outstanding

The calculation is as follows.

Example

Here is a very simple example of how to calculate DSO.

A company started June with $700 in receivables (Invoices still not paid from May and earlier).

Lets say the company had sales of $1100 in June.

• The company got cash for $100 that was not cash for invoices. Some one came into their office and gave them $100 for a widget that never got invoiced.
• They generated invoices with Net 30 day terms (customer has 30 days to pay) for the other $1000. These are “credit sales”. The total Credit/Invoice Sales for June will be $1000 (not $1100 since they got cash for $100 and never invoiced it, the DSO on that cash is 0).
• During the month they got payments on invoices of $500.
• So $700+$1000-$500=$1200 for their accounts receivable at the end of June. 700 that was still open + $1000 in new invoices – $500 in payments
• NOTE: it does not matter what invoices the $500 got applied to or even if it gets applied for the DSO calcualtion. It just matters what the A/R is at the end of June.
• Their accounts receivable at the end of June would be $1200. The DSO for the month of June would be $1200/$1000 X 30 (# of days in June) = 36.

A 36 day average to get paid is not to bad. Generally speaking, if your DSO is under 40 (assuming Net 30 day credit terms) you are fairly efficient at collecting your money.

DSO measures efficiency not effectiveness.

In a future article we will show you the problems with DSO. Your goal is to get paid faster and there are other performance indicators that can be used, along with DSO, to get a clearer picture of your collections effectiveness.

Check out this next post in this to get a couple of alternative ways to measure your effectiveness

Once again, this sounds simple, common knowledge every business owner or manager should know, right?  Unfortunately knowing the rules and following them are two completely different things. How can this be solved? Simple, and it is, employ a method which corrects the commonly overlooked or unmanageable targets in a companies accounts receivables. Invoice generation, invoice delivery, ease of payment for your customers, cash application, open invoice management, and collections. This is the purpose of an EIPP system, Electronic Invoice Payment and Presentment. Integrated with a company’s order and accounting systems along with the internet as a transfer method, invoicing and payments can flow smoothly, increasing cash flow.

First we must generate the invoice. This may be done manually or using order and invoice software. Amounts, items, fees and payment due dates are generated to match contracts provided and an invoice is born.  This invoice then must be delivered to the customer. Mailed invoices have several inefficiencies; these must be reduced to streamline cash flow. Several costs, realized or unrealized are inherit to paper invoicing. Printing, envelopes, postage, time lag for actual delivery, and payment processing once received, all diminish profit, in some cases substantially. A twenty dollar invoice may cost up to five dollars to process and deliver, that cost doubles if there is a second mailing. With electronic delivery, material costs are eliminated, postage is eliminated and there is no time lag, the invoice can be directly emailed to the individual in charge of processing. Plus we are reducing the nasty CO2 emissions.  Second deliveries or follow ups are easily duplicated by regeneration of the electronic document. This is technology at work from the beginning steps; creation to delivery in 60 seconds, by following this first step through the entire process, payments can be just as efficient.

In my next post I will review payment options, which ones work, which ones don’t and most importantly, what works to get your company paid the fastest. Remember that is the goal of accounts receivable, get paid faster.