Daily Sales in Accounts Receivable shows how many days it takes to collect credit sales, revealing cash flow efficiency and payment collection speed.
Days Sales in Accounts Receivable, often referred to as DSO (Days Sales Outstanding), is a financial metric that measures the average number of days it takes a company to collect payment after a sale has been made on credit.
It is an important indicator of a business's cash flow efficiency and its effectiveness in managing customer credit and collections. A lower DSO generally suggests that a company is collecting its receivables quickly, which can enhance cash flow and reduce the risk of bad debts.
Conversely, a higher DSO may indicate that a company is taking longer to collect payments, potentially leading to cash flow issues and signaling inefficiencies in the credit or collection process.
This metric is particularly relevant for businesses that operate heavily on credit sales, as it helps management monitor how well the company is turning its accounts receivable into cash.
Tracking DSO over time can also help identify trends or shifts in customer payment behavior, which can help in making informed operational and strategic decisions.
Days Sales in Accounts Receivable Formula
The Days Sales in Accounts Receivable (DSO) formula is:
Where:
Accounts Receivable = total outstanding credit sales at a given time
Net Credit Sales = total sales made on credit (not cash) over a period
Number of Days = typically 30, 60, or 365 depending on the period analyzed
Example (using 365 days):
If your accounts receivable is $50,000 and annual net credit sales are $600,000:
This means it takes roughly 30 days on average to collect payment.
How to Lower Your Days Sales in Accounts Receivable
Lowering your Days Sales in Accounts Receivable (DSO) improves cash flow and reduces the risk of bad debt. Here are effective strategies to achieve that:
Invoice Quickly and Accurately: One of the most effective ways to reduce DSO is to send invoices immediately after delivering goods or completing services. Delays in invoicing often lead to delays in payment. Using automated invoicing software can help streamline this process and reduce human error. It's also important to ensure invoices are accurate, with clear payment terms and correct customer information to avoid disputes or confusion.
Tighten Credit Policies: Reviewing and adjusting your credit policies can significantly impact your receivables. Before offering credit to new customers, perform a credit check to assess their financial reliability. For customers with weaker credit histories, consider setting lower credit limits or shorter payment terms. Requiring deposits or partial payments upfront can also reduce your exposure to late payments.
Offer Early Payment Incentives: Encouraging customers to pay sooner and offering early payment discounts is another effective method. For example, you might offer a small percentage off the invoice total if payment is made within 10 days. These incentives can be a small cost in exchange for improved cash flow and a lower DSO.
Follow Up Consistently: Use automated reminders to notify clients of upcoming due dates or overdue invoices. Assigning a dedicated team member to manage collections and maintain regular communication can also help ensure that accounts don't slip through the cracks.
Make Payments Easy: Making it easier for customers to pay can accelerate the payment cycle. Offer a variety of payment options such as credit card, bank transfer, or online payment portals. If you send invoices electronically, include a direct payment link to simplify the process for the customer.
Monitor Receivables Regularly: Keep a close eye on your accounts receivable and review aging reports frequently. These reports help you identify which customers are late and how long their payments have been outstanding.
Enforce Late Payment Penalties: Charging late fees is a practical way to encourage on-time payments. Make sure your payment terms include information about penalties for late payments, and apply those penalties consistently. This shows customers that your business takes its credit policies seriously.
Build Strong Customer Relationships: Good relationships with your clients can positively influence their payment behavior. Communicate clearly, provide excellent service, and respond quickly to any questions or disputes. When customers trust your business, they are more likely to prioritize paying you on time.
Outsource Collections (if necessary): If you have chronic late payers, it may be time to bring in external help. Collection agencies or factoring companies can manage overdue accounts more aggressively, freeing up your internal resources. While this often comes at a cost, it can be worth it to recover funds that would otherwise remain unpaid.
Aim to keep your DSO below your average credit terms. For example, if you offer net-30 terms, a DSO of 30 or less is healthy.
Wish you could eliminate credit card fees altogether?
Accounts receivable is money owed to a business for goods or services delivered—recorded as a current asset and vital for cash flow and financial health.
