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Days Sales Outstanding and How to Measure It

days sales outstanding

How do you measure the effectiveness of your accounts receivable management? Days sales outstanding (DSO) is a benchmark that shows you how long it takes customers to pay you after creating an invoice. Here we delve into the details of how to use this metric and what you can do to improve it.

What are days sales outstanding?

Days sales outstanding (also called debtor days) is a financial ratio that shows the average number of days receivables are outstanding before payment is received. Using the days sales outstanding benchmark will show you how effective you are at collecting outstanding invoices. A high DSO can point to potential problems. Although your accounts receivable balance appears on the balance sheet as an asset, if it takes too many days to collect these assets, it will hinder cash flow and business growth. 

To calculate the days sales outstanding formula, you need to know the current accounts receivable and total annual credit sales. The DSO calculation is: 

(Accounts receivable ÷ Total credit sales for the year) x Number of days in the year

Here’s a days sales outstanding example. If a business has $1.5 million in annual sales and $175,000 in accounts receivable, the DSO formula will be: 

($175,000 ÷ $1,500,000) x 365 = 42.58

For simplicity, we’ll round up and say that the DSO is 43. This means that it takes 43 days, on average, between the invoice date and getting paid. A higher DSO points to poor collection practices when it comes to accounts receivable. 

Another way to analyse the state of your accounts receivable is called accounts receivable turnover ratio. This measures how many times per year that you collect your outstanding receivables. Days sales outstanding is used to calculate an important metric called the cash conversion cycle. Find out more in Cash Conversion Cycle: What Is It and How Can You Improve It? 

Ways to improve days sales outstanding

Fortunately, there are solutions for businesses that offer payment terms and have trouble collecting payments on time. Here are a few:

  • Create and implement credit policies and procedures – these are a roadmap to help you start out on the right foot with customers. Policies and procedures can include the steps for approving new customers for payment terms (such as credit score and reference checks) and the collection process. Learn more about creating credit policies and procedures.  
  • Invoice immediately when goods or services are delivered – when you invoice immediately it creates a sense of urgency and enables customers to connect the invoice to the goods or services provided.
  • Make it easy for customers to pay you – making it easy for customers to pay will help to reduce days sales outstanding. Offer several ways to pay, including bank transfers, credit cards and cheques. Choose an invoice design that’s easy to read and clearly shows the amount due. Include contact details on the invoice for customers to get in touch if they have questions about the invoice. 
  • Send out reminders when payments are late – research has shown that reminders speed up invoice payments. One study by ezyCollect found that 59 per cent of overdue invoices require three or more follow-ups before they’re paid. Some accounting programs can be set up to automate reminders when invoices are overdue.

A new solution for reducing days sales outstanding

If you have a high DSO that’s impacting your cash flow and limiting business growth, Moula Pay is a finance option that can help. When you sell to other businesses and your customers pay with Moula Pay, you get paid upfront. At the same time, your customers get up to three months free from interest and repayments, or can take a longer-term repayment plan if needed.

When you become a Merchant with Moula Pay, you can:

  • Get paid upfront – give your customers excellent payment terms that improve your cash flow.
  • Stop chasing payments – outsource the pain of chasing invoices, and let Moula take the risk of unpaid invoices.
  • Sell more, more often  – giving your customers access to more funds means they can spend more with you.

Learn more about how Moula Pay can give your customers great payment terms, improve your cash flow, and decrease your days sales outstanding.

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Business content for Australian SMEs. Sharing guides, growth hacks, and expert tips on finance, sales and marketing, and tech.

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