Days Sales Outstanding which is better known as DSO is one of the important metrics to be noted by every finance team and CFO. But they are mostly ignored until the accounts receivable of a company turn into a threat to the company's cash flow.
Please don't make the same mistake!! Because "Prevention is better than cure".
First, let's clear the view on DSO!
In contrast to most financial metrics, it is not measured in dollars. It is expressed in days. A company's average collection time is the number of days it takes to collect payment on a sale. It is the amount of time it takes to collect payment from your customers.
This is a good way to determine whether you have been too lax in collecting payments, which can impact your liquidity, or if you are too rigid, which might dampen sales.
As well as being used for measuring an Accounts Receivable operation's effectiveness, it can also be used to examine a company's cash flow or even customer satisfaction. It is a highly effective metric that can be applied to a variety of applications.
Cash flow problems can be signaled early by this indicator. In addition to paying its bills, your business is likely to do so regularly. You may not be able to pay regular expenses or make capital improvements if your DSO keeps increasing. Increasing headcount can be difficult if you don't have the funds on hand to cover the additional expense.
DSO increases can lead to a decrease in customer satisfaction. If your product isn't providing a meaningful impact, customers are less likely to pay on time to avoid suspension of service.
A company may choose to offer larger customers more favorable terms. It is possible, for example, to request payment from a large account within 60 or 90 days, while requesting payment from a smaller account within 30 days. One or two such accounts can increase the amount of time that your sales go uncollected on average.
In general, you'll want your DSO to fall within 20 percent of your standard policy. For example, if you request payment from a typical customer within 30 days, 36 days should be your maximum target.
You can also consider providing incentives, improving your dunning and chasing, or making some simple changes to your invoice templates. The most important thing is to make your A/R operation efficient so that customers will be able to pay.
You can make your accounts receivable more responsive to customer needs and update your strategies easier by automating them. Accounts Receivable Automation will make your business more efficient and effective. The quickest way to offer incentives for early payments or send chase letters is to automate the process.
Furthermore, modern customers are used to being able to make payments quickly and easily. Ensure that your customers can access their payment portal and pay through a variety of methods, keeping up with your competitors. Remove as many barriers as you can.
It allows you to understand accounts receivable better than most other equations, which is why DSO is the gold standard of accounts receivable metrics for many companies. Although it may not be of the utmost importance to your business, you should at the very least track it and try to find the ideal number.
Your company's DSO is completely reliant on your accounts receivable. In that case, you have to manage the accounts receivable of your company in a streamlined manner.
That's where the Maxyfi will help you. Just integrate your cloud accounting books with our application and witness the wonders.
We'll send reminders to your customers through various communication channels, form powerful collection strategies and help you to recover your accounts receivable within the payment terms.
Adopt yourself to this AI world, and save your time. Believe in Maxyfi's strategies. We'll ensure your balanced accounting.
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