Day Sales Outstanding (DSO) – Debt Recovery/Credit Control Tool
In the world of debit and credit, ensuring that your company has an effective credit control department is essential. Evaluating and understanding how long it takes a company to get paid from its debtors is an important factor to ensuring a healthy cash flow. It is also an important factor in understanding when to move to a legal debt recovery process in order to get paid. In order to understand and manage the cash flow of a business, many businesses evaluate the effectiveness of their accounts receivable department and the health of their cash flow by calculating the ‘days sales outstanding’ (DSO).
What is Day Sales Outstanding (DSO)?
Day Sales Outstanding (DSO) is a financial calculation that helps a company determine the number of days, on average, it takes for them to collect payment from credit sales of the business. It is a calculation that, if used, should be taken on a regular basis, preferably monthly so that over time you can spot any trends or movements in the number of days it takes your company to be paid.
DSO is usually calculated by the following method:
_______________________ x Number of Days
Total credit sales
This calculation can uncover trends of sectors/customer bases with cash flow problems. In knowing this information, a company can then change its approach to credit when dealing with the customer base in question to protect its own cash flow.
Low Vs High DSO
DSO is considered an important tool for measuring the liquidity of a business. A high DSO is an indicator that a business may be having difficulty in getting paid. This might be because of credit terms or simply not having sufficient time or staff dedicated to collecting sums due while a low DSO typically indicates that a business is getting paid quickly and controlling credit to their customers or clients.
Ideally, the DSO should not exceed the number of days laid out in your credit terms at all but if it does then it is usually recommended that it should not do so by more than 14 days. This 14 day period applies irrespective of whether your credit terms are 30 days or 60 days and so on.
DSO will be impacted by a variety of factors such as sales volumes, varied terms and credit control processes, therefore it is important to see the larger picture within which DSO is calculated to have a better understanding of your business.
By monitoring your business’s DSO it may become apparent that your credit terms are not being adhered to or you need to engage more staff to ensure collections and you may need to make changes in these areas.
When certain accounts may become problematic for your business’s internal collections procedures due to the length of time these accounts are outstanding then your business ought to take action sooner rather than later as it may be time to look at other methods of collection to solve the problem.
How to reduce a high DSO and restore a healthy cash flow
If a company is faced with a high DSO, there are a number of steps that can be taken to help reduce this ratio and ensure that the cash flow/profitability of the business is not affected.
Take a look at the companies invoicing procedure, analyse this process to make sure that customers are receiving their invoices on time. How clear are your invoices? Are they confusing? If so, you should look at simplifying them so as not to confuse the client. Consider how you allow your customers to pay their invoices – do you have an online facility for payments? If not, then maybe putting one in place may help your clients pay faster. Have you considered rewarding those who pay early and charging those who pay late? This would send a message to your clients and can help entice them to pay on time, if not early.
You’ll be surprised what you’ll find out if you simply ask! Consider asking those clients who pay late, why they are paying late each month? From their answer, it may be possible to devise a strategy so that on-time payments may be possible. You may be able to implement payment plans with clients who are struggling to ensure that you recover your debts faster.
Are you consistent with customer reminders for payments? Sending out reminders may help put your bill at the forefront of the client’s mind. If you are not issuing reminders at the moment, you may want to implement a reminder system that can help you get paid faster.
Have you thought about how your credit terms compare to other companies in your industry? Is it possible that your credit terms are unrealistic? Research the industry and compare your credit period with others, if you find that your credit period is much shorter than your competitors, maybe you need to adjust your credit period to suit your clients and in doing so you would have a much more realistic view of your DSO.
Credit Approval Process
Are you giving credit out too easily? Analyse your credit approval process and ensure that you have a comprehensive credit approval application and credit check facility. It is wise to be cautious about who you give credit to, as more bad creditors you take on the worse your cash flow will become. Extending credit to the right customers can have a positive effect on your DSO and cash flow.
Involve Debt Recovery Solicitors
How long do you leave a creditor sit before you move to the next step and instruct a debt collection solicitor to recover your debt for you? If after numerous reminders your debtor is still not paying their debts or not responding, then it is time to move one step further and go the legal route to collecting your debt. Having a 7-day demand letter issued from a solicitor to your debtor demanding payment can significantly reduce the time you will spend getting a debtor to pay their bill. Many cases have been resolved simply by sending the debtor a demand letter – it can be a simple, easy way to get paid faster.
Carlisle Solicitors dedicated debt recovery team have years of experience in assisting companies to get paid faster and are on hand to help you move through the debt recovery process with ease. To get 7-day demand letter issued to your debtor or for a confidential discussion on how you can get paid faster, contact Sarah Walsh, Debt Recovery Solicitor on 01 653 33670 or via email at firstname.lastname@example.org and tell her about your case.