Days Sales Outstanding (DSO): Why is this important?

Days Sales Outstanding (DSO): Why is this important?

What is DSO?

Days Sales Outstanding (DSO) quantifies the average number of days it takes for a company to collect payment after a sale is made. This tells you how much of your cash is tied up in customer accounts receivable.

Why is it important?

Reducing and keeping DSO at an acceptable level directly impacts liquidity and your company's ability to operate successfully.

What is the optimal range for DSO?

In general, your DSO should be 45 days or lower. If DSO is above 45, processes should be looked at to determine areas that need improvement and changes that can be implemented. A DSO value of 91 days or more represents a critical situation that requires immediate attention.

What is considered best practice for DSO?

Improving DSO requires attention on two fronts.

First, enhancing the efficiency of your AR processes by such practices as:

•      Invoicing Promptly: Send out invoices as soon as product is delivered, or services are rendered. The faster and invoice reaches a customer, the faster they are likely to pay.
•      Make it easy for customers to pay by offering multiple payment methods.
•      Enforce late payment penalties and even offer early payment discounts.

Second, revisiting and possibly revising your credit policies. For instance:

•      Setting Clear Credit Policies with customers to ensure that they know payment deadlines, terms, and potential early pay discounts or late pay penalties.


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