CFOs and CEOs, are you familiar with DSO? If not, you really should be. In today’s business landscape, your cash conversion cycle can make a big difference between the success or failure of your company. While many businesses focus on improving their DPO (supplier side) and DOI (inventory holding) metrics to enhance their cash flow, the real impact can be found by examining your customer base and their payment habits, which is reflected in the DSO metric.
Take a company with £20 million annual credit sales with 15 days delinquent (excess) DSO. Daily credit sales would be around £55,000 X 15 Days = £825,000 excess investment, or money, trapped in receivables. If you assume interest at say 3-4%, then an additional £30K of annual interest is being paid or not earning interest through cash not billed, collected or allocated on time.
Do you know what your operating DSO is and whether it’s getting better or worse over time?
How do you calculate DSO? Good question and you should decide what DSO formula best suits your business and be well on your way to measuring it, monitoring it and most importantly, improving it.
There are many ways to calculate DSO, here are 7 of them!
- Standard DSO (Total AR due and not/Total Revenue in period X Days in period)
- Sales weighted DSO (Like above but calculated monthly then averaged by period)
- True DSO (like standard but calculated invoice level and then sum of all invoices)
- Best possible DSO (Like standard but excluding AR due/Total revenue X days)
- Delinquent DSO (Standard DSO – Best Possible DSO)
- Countback DSO (DSO of previous month plus no. of days in current month)
- Aging/goof (Sum of outstanding days of all overdue/Total no. invoices due or not)
What do you need on a real-time basis as a CEO or CFO?
Regardless of which of the methods above you choose, you should at least be getting the report shown updated automatically on a daily basis (for the current month) with a rolling 12 month history and preferably a year-on-year comparison to take into account any seasonality effects. The report below would tell you that not only are you constantly operating outside of your standard credit terms of say 60 days but that despite significant improvements made during the current year, there is still a long way to go to and a lot of delinquent DSO (improved cash flow) that can be squeezed out of your business.
Consistently operating outside of your standard terms can mean that either your credit management team is asleep at the wheel, or your sales team has taken on lots of new customers on extended payment terms, or you have some serious operations problems that mean customers are not paying bills due to delivery disputes, or other problems.
Where do you start to get this back on track?
Management by spreadsheet will not help you here. You will need real-time views by different business types, different customer sets, as well as by different collector teams and individuals, even down to individual customer level. You will need an integrated view of your customers and interactive tools to manage overdue payments, resolve customer disputes, facilitate easy payment, and quickly provide back-up documents and copy invoices to facilitate payment. To get delinquent DSO down to net-zero you may also need advanced AI and machine learning capabilities and advanced cash allocation and e-invoicing facilities alongside your collections and credit management software hub.
Most importantly, if you can’t measure it you can’t improve it so you will need advanced reporting tools and dashboards (like above) that update daily and provide a view of performance vs target and history.
Looking for a partner in advanced reporting?
Onguard is a world leader in the credit management automation space based on over 30 years of experience with over 750 customers worldwide from all industry sectors. We can get your organisation up and running quickly and cost effectively with a rapid return on investment and a 20% improvement in DSO performance.