In life, we need to know what we have and what we do not have, to successfully live. In business, it can become complicated due to inventory, sales, marketing and carry over. We always need to know very specific numbers to ensure that the business is the very picture of health. One of those numbers is the Days Sales Outstanding or DSO. This is quite literally, the number of days a sale is open and unpaid. Sales are the lifeblood of a business, healthy sales mean healthy business. Unless healthy sales are not being paid. This is where knowing your DSO comes in handy. Knowing this number allows a business to continue to operate in a robust and efficient manner. It also helps to know when and what actions need to be taken.
But, what is the DSO? It is the average number of days it takes for a customer to pay for goods or services. A smaller number means that a business has good cash flow and is able to access that cash to reinvest it in the business. I know what you’re thinking, “But, how does one calculate the DSO?” To calculate the days a bill sits open, compute the average daily charges for the past three months, add up the charges posted for the last six months and divide by the total number of days in those months. Now, divide the total accounts receivable by the average daily charges. And Voila! You have your DSO number. Now you are ready to work your business and bring in the capital needed to run smoothly. This is how you will know if you need a collection agency or if can you collect in house.
A hearty DSO ratio falls within less than 133% of sales. So if I make a sale that has terms of 30 days, and it takes 40 to get paid, I have a decent ratio that will serve my business. However, the longer it takes to get the sale paid, the higher the ratio and the less usable cash a business has. If I need to buy a new copier for my office and I have $50,000 in receivables and a ratio of 145% I may not be able to get that copier because I haven’t the liquid capital to pay for it.
This is where companies need to begin to look at how they are remedying this issue. If a company allows this ratio to get bigger, they are simply bleeding money. And after a while, it doesn’t matter how many people owe you if they don’t pay, you are cash poor! In his book, “Secrets of Cash Recovery”, Terry Taylor says “If you make a sale but never get paid did you really sell anything?” For this reason, companies hire collection firms. Whichever route is taken, the idea is to shrink that number to make the company go from surviving to thriving.
A simple accounting program or book-keeper can help to ensure this number is clear to you whenever you want it. The sooner one knows what their DSO is, the sooner they can take action. Once past due accounts are collected, a company can work toward creating systems that prevent accounts from falling too far behind. In the mean time, it is important to determine if you need to open a collections department, hire and agency or look for a good collection attorney.
Taylor outlines the need to act on aging accounts. “The big problem is that companies hold onto accounts, on average, nine to 10 months, four months longer than they should.” The older the invoice gets, the lower the percentage of the balance is able to be recovered and the harder it is to collect. The DLR Firm has a proven record of the highest net dollar collected in the shortest amount of time. The DLR Firm has helped many companies, worldwide, to resolve their old or aging receivables and shrink that DSO to a strong number that works for the company.