Md.Mustakim Ahmed 🧙‍
Jasbir Singh
Ajay
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How to calculate and optimize your DSO?

How to calculate and optimize your DSO?

Contents :

  1. What is DSO: the definition
  2. How to calculate DSO: the formulas
    1. The accounting formula
    2. The sales exhaustion formula
  3. How to optimize your DSO: actions

 

What is DSO: the definition

DSO, Days Sales Outstanding (the days sales outstanding is a financial indicator used to measure the speed with which a company is able to collect its receivables from its customers. This is a key indicator for customer risk management and credit management.

This is the average number of days it takes a company to collect its invoices.

The variables that influence average payment time are :

  • The total number of invoices issued,
  • Visit payment terms of customers,
  • The average length of customer payments,
  • Customerdisputes or late payments,
  • The total amount of the company’s of the company,

Plus the DSO is lowthe faster the company is able to collect its receivables. receivableswhich may indicate a healthy financial health.

A DSO highon the other hand, may indicate that the company is having difficulty collecting its receivables. This can lead to problems with cash flow and lower profitability.

Monitoring DSO therefore enables a company to manage its cash flow and make informed financing decisions.

As a general rule, a DSO of 30 days is considered acceptable, while a DSO of over 60 days may be considered high and could lead to cash flow problems. cash flow for the company.

Statistics on late payment by French companies :

  • 2020: 14 days’ average late payment
  • 2021: 12.5 days’ average late payment

In 2022, delays are again on the rise. B2B companies, for example, increased the number of late payment days by 1.5 times between 2021 and 2022.

Far ahead, however, are B2G companies in the public sector, with an increase of 2.6.

 

How to calculate DSO: the formulas

The accounting formula for calculating DSO :

DSO = (Total receivables / Total sales) x Number of days in the period under review

First, divide the company’s total receivables by its total sales over the period in question.

This will give you the percentage of its sales that have not yet been collected in the form of receivables. receivables.

Then multiply this percentage by the number of days in the period in question (e.g. 30 days for a month, 365 days for a year).

This will give you the average number of days it takes a company to collect its invoices.

For example, if a company has receivables totaling 50,000 euros and total sales of 100,000 euros over one month, its DSO will be :

DSO = (50,000 euros / 100,000 euros) x 30 days = 15 days

This means that the company takes an average of 15 days to collect its invoices.

This is undoubtedly the simplest and fastest formula. However, this formula assumes stable sales. In the case of variable sales, the result is often distorted.

 

The sales depletion formula for calculating DSO :

Let’s take the example of variable sales over a two-month period.

Month 1 (31 days): Total accounts receivable – Total sales = positive result = Accounts receivable exceeds sales

The DSO is therefore greater than 31 days.

Month 2 (28 days): Total amount of outstanding receivables – Total amount of sales = negative result = No outstanding receivables.

The DSO is therefore less than 59 days.

For example, if a company has trade receivables totaling 50,000 euros in January, for total sales of 20,000 euros. It recorded sales of 40,000 euros in February. Then its DSO will be :

Customer outstandings in January (31 days): 50,000 – 20,000 = 30,000

Calculation of outstanding balance for the month of February (28 days): (30,000 / 40,000) x 28 = 21 days

DSO = 31 days + 21 days

This means that the company takes an average of 52 days to collect its invoices.

 

How to optimize your DSO: actions

Optimizing your DSO usually involves the use of
collection software
. It enables relaunch customers on time with an automated reminder, avoiding late payment late payments. Track customer profiles with a complete history…

With Aston iTF, you can automate up to 80 percent of dunning/collection tasks and significantly reduce your DSO.

DSO ASTON iTF