What you need to know about DSO

In today's increasingly competitive environment, companies must offer sales and payment on credit options to retain customers and attract potential customers. However, late payments and non-payment can have a serious impact on cash flow, which is why DSO is important. How to interpret the result of the DSO calculation?  In this article, you will learn all about DSO.

What is the definition of DSO ?

DSO (Days Sales Outstanding) is an important financial measure related to cash management and primarily reflects the effectiveness of a company's credit management. For more information, click on accounts receivable software. In simple terms, it is the average time between the date the product or service is invoiced and the date it is collected. It is calculated in days and is determined by 3 variables:

  • the payment term granted to the customer,
  • the advance paid by the debtor company,
  • the number of days of delay,

As one of the main components of WCR (Working Capital Requirement), which is the amount a company needs to finance the difference between cash inflows and outflows, companies should not ignore DSO.

How to interpret the result of the DSO calculation ?

When the DSO is low, it means that the payment period is short and therefore the company's cash flow is higher and more available, which leads to a decrease in the working capital requirement (WCR). When the WCR is high, the opposite is true and the WCR increases, which is detrimental to the company. It is therefore very important for a company to regularly monitor its DSO and try to reduce it as much as possible.

Why do we have a high level of DSO ?

There are many reasons why companies have high DSO, which fall into two categories: Internal reasons and External reasons. When we talk about internal causes, we are referring to the role of creditors in explaining the poor performance of the DSO. Indeed, late payment is not necessarily the fault of the customer. The customer then has the right to refuse payment to the company. Another internal cause of increased DSO is priced undercutting. 

When a company is faced with invoice mismanagement, it is difficult to blame the customer. Blame the company's organization or the work of its employees. External causes, on the other hand, are due to events outside the company and are usually blamed on the customer.  An increase in delays may be due to poor cash flow or accounting management on the part of the customer or to the company's disorganization.