Every business runs on cash and the ability to collect your account receivables (AR) as soon as possible will increase your company’s efficiency and profitability. Failing to evaluate your DSO can lead a stellar performer to a nickel-and-dime operation. So let's look at why it’s so important.
Let’s say you have a total amount of $35,000 in AR and your DSO is 125. From the day you’ve sold your product or service it takes an average of 125 days for you to receive the amount. The higher your DSO the longer it takes for you to receive the payment you can use to pay your lease, payroll, credit card or any other expenses for your business.
So, how do we calculate days sales outstanding you may ask? Simple, to calculate your dso ratio, divide your average AR by your annual credit sales and divide it by the number of days.
Suppose you want to calculate the DSO for a specific date range and on July 1st your AR is $35,000 and August 1st your AR is $45,000. Your average AR would be $40,000.
Next is calculating the total credit sales. During July 1st to August 1st how much (in $ worth) product or service did you provide? Let’s assume this amount to be $80,000.
The last part is the number of days between July 1st to August 1st - 62 days.
DSO = (Average Account Receivables / Total Credit Sales) * Number of Days
For the example above the equation will look like;
($40,000 / $80,000) * 62 days = 31 days
Try it for yourself below by plugging in your own numbers.
If you’re using Quickbooks just follow these 7 steps to calculate the DSO in just a few clicks.
By now, I’m sure you’re fully aware that a lower DSO is better than a high DSO. So, let’s look at some simple steps to help you get that DSO to a manageable number:
If you’re still unsure how you can improve your process to decrease days sales outstanding for your business don’t hesitate to reach out to one of our InvoiceSherpa experts!
Why is DSO important?How to Calculate Days Sales Outstanding (DSO)DSO Calculator & Formula Calculating DSO in QuickbooksHow to improve days sales outstanding ratiointegrated payment solutionsBristeeri Technologiesautomatic remindersautomatic payment solution
Posted on October 26, 2020
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In this guide, we’ll walk you through how to outsource accounts receivable to a reliable, trusted provider so you can save time and stress less, while improving cash flow within your business.