How can you use DSO to improve business performance overall?
DSO (Days Sales Outstanding), or sometimes known as debtor days, is the average number of days your customer takes to pay your invoices. It is an ever changing figure but calculated regularly it can give you a good indication of your collection performance and to set targets.
Monthly DSO reports should be produced so that you can identify any trends, and should show the last 13 months performance to enable you to analyse seasonal changes.
Misguided assumptions with DSO calculations
When changes occur in DSO, i.e. debtor days have gone from 32 to 35, it is assumed that this is due to an issue within the credit control department. This is not always the case however, as many elements will go into the collection performance of a business, be it disputes due to delivery or incorrect information on invoicing delaying payment by customers. So should your debtor days rise, it is worth taking a look at the business as a whole rather than purely the credit control department, although they should be your first port of call as they will may have a better understanding as to why an invoice has remained unpaid or disputed.
You should also be aware that what is considered ideal debtor days for one industry will not necessarily be the same across all industries, where 30 days indicates effective collection performance for one business, 45 may be the norm for others.
What it should tell you to improve business performance
Calculating your DSO should enable you to set targets for collection performance, but also to identify areas of the business that require improvement. There are many factors that could go into higher debtor days, identifying what the contributing factor is will be the tricky part; are invoices going out on time? Have you had many disputes? Are you taking too long to decide on the correct course of action? Are your customers happy with the service you’re providing or are they withholding payment due to being unhappy?
Our Credit Management Reporting Toolkit will provide you with a step by step guide to calculating your DSO, click here to download your bundle.
