In an ideal world you will get paid as soon as you’ve delivered your product or service to your client. Unfortunately, it can take days or weeks before you see the cash in your account. Days sales outstanding, also known as DSO, is a way of measuring the average number of days it takes for you to get paid when you bill or invoice a client.
Why is DSO important?
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.
How to Calculate Days Sales Outstanding (DSO)
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 Calculator & Formula
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.
Calculating DSO in Quickbooks
If you’re using Quickbooks just follow these 7 steps to calculate the DSO in just a few clicks.
- First select “Reports”
- Under Reports choose “Sales” –> “Invoice List”
- Set the date range you want to calculate DSO for and run the report
- You should see something that looks like this
- Now you have your invoice list for that period, you can add up the total invoiced during that period, do this and write that number down.
- Now the trick is how do you know if an invoice was paid it was paid in the period we care about? The short answer is that you need to drill down into each invoice and see when the payment were made to determine this, a pain I know.
- So now you should have the total “credit sales” or total amount invoiced, the payments on those invoices in that period and you calculate the number of days.
How to improve days sales outstanding ratio
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:
- Establish payment expectations – Make sure your client clearly understands your payment requirements before you start doing business with them. Put it in your contract when and how they will be invoiced. You can provide a discount for early payments or charge an upfront deposit. What methods of payment can the client make payments with? Can they mail you a check, or do you require an ACH? Be specific and detailed in your initial agreement. This will eliminate surprises and time for both you and your client.
- Make the payment process easy – To make the payment easier for both parties send your invoices electronically. Better yet, automate your invoices and send them automatically to your clients. Provide integrated payment solutions to your clients so they can pay more efficiently. Bristeeri Technologies lowered their DSO by 55% by integrating a new payment gateway for their clients.
- Remind them! – Oftentimes businesses simply forget to make their payment. To lower your DSO, it’s important to remind your clients of upcoming due dates or any outstanding invoices that are past due. Set up automatic reminders so you don’t always have to stay on top of your invoices.
- Automate the payment process - If you have recurring charges set up an automatic payment solution so both you and your client can spend less time stressing over invoices and focus one what’s really important - growing your business!
- Thank them for their payment - Sending a thank you note gives your client an acknowledgment that you received the payment. Not only that it can improve your customer relationship, encourage timely payments and even encourage future sales.
- Communication is key - Maybe your client hasn’t paid because he’s waiting for HIS client to pay or maybe he has a personal emergency. Communication is information. If you know the circumstances, you can even offer them a payment plan. Sure, you’d like that whole invoice to be paid today, but this way you can at least get paid a part of what is owed and improve client relationships. The client will appreciate it and become more likely to do business with you again.
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!