Day Sales Outstanding (DSO) is a critical financial metric that measures the average number of days for a company to collect payment after making a sale. In particular, it shows how effective your cash flow is.
Now, picture this: A business is expecting timely payment after delivering a service to its customer. Days and weeks pass, and a payment has not been made. Finally, the customer informs the business to expect the payment to come in late. This scenario is very common when it comes to business finance. A wrench thrown into the operations of your business can lead to more than a few disruptions, including affecting your DSO.
In this article, we take a look at how critical DSO is in reflecting a company’s financial health and how a DSO calculator can help.
Facing delayed payments from customers
Delayed payments suggest inefficiencies and poor working capital management such as limited cash flow, budgeting disruptions, and forecasting issues. This makes growth for a company difficult because the business has their hands tied when it comes to making investments and meeting financial obligations.
Extended payment cycles directly impact every stakeholder in the business. Your suppliers are affected when you are unable to pay them on time. Meanwhile your operating expenses are at risk if unforeseen incidents happen. Additionally, you keep your customers waiting on growth opportunities and partnerships that could be easily committed to with proper financial management. All the above ultimately leads to less trust and poor business relationships.
Root causes behind delayed payments
When the DSO rises, it means that there is an extended period between the sale of goods or services and the receipt of payment. The effect of cash flow is often underestimated and serves as a red flag for underlying business issues.
Late payments happen for several reasons. Firstly, the customer could be facing financial constraints, hampering their ability to settle their invoices on time.
Another common cause is disputes. Differences between customers and businesses regarding invoicing terms lead to prolonged negotiations, contributing to an upward trend in DSO. Sometimes, errors in the accounts receivable process worsen the situation of receiving timely payments.
Finally, credit and collection policies pose a barrier to achieving a lower DSO because they might differ from one operation to another. Therefore, it is necessary to research and address gaps within the business.
Calculating DSO
The journey from sales to payment is not always a smooth journey, but it can be with the right solution. By calculating your DSO, it becomes easier to take action. B2BE offers a free, online DSO calculator to ensure you get the ROI you need for any project. With a solid figure in hand, you can then use this to assess your financial health accurately. As well as determining areas of improvement.
A high DSO might seem daunting at first, but it presents the perfect opportunity for your business to correct and optimise cash flow management strategies. A few changes can go a long way, including tightening credit terms, using automated invoicing solutions, offering incentives for early payments, and improving accounts receivable management.
Fazit
By this point, you understand the causes and impacts of delayed payments. As well as ways to rectify this issue using a DSO calculator. DSO, the main indicator of your cash flow efficiency, reflects just how important it is to manage your accounts receivable processes properly so that you can move towards financial stability and business growth.
Learn more by accessing our FREE, online DSO calculator.
Über B2BE
B2BE liefert weltweit elektronische Supply-Chain-Lösungen, die Unternehmen dabei helfen, ihre Supply-Chain-Prozesse besser zu verwalten und ein höheres Maß an Transparenz, Prüfbarkeit und Kontrolle zu erreichen. Unsere Leidenschaft für das, was wir tun, inspiriert uns zu Innovationen und untermauert unser umfangreiches Wissen. Die B2BE-Teams verfügen über mehr als 20 Jahre Erfahrung und sind weltweit tätig.
Weitere Informationen finden Sie unter www.b2be.com.