The median number of times a business takes to collect money following a sale. It is measured by the financial collections performance statistic known as Days Sales Outstanding.
A key performance indicator (KPI) is also known as times to collect. It aids in a better understanding of money conversion cycles and cash flow optimization. As well as AR management of finance and accounting executives.
It’s simpler to keep an eye on working capital swings and liquidity, especially when you have a clear picture of the typical DSO over time.
Days Sales Outstanding Formula
An average AR balance is divided by your revenue for a specified period and then multiplied by the number of days in the period. It’s the formula for calculating your days’ sales outstanding.
Think about a business that makes $1 million a year with an average amount of $150,000 in AR. Its Days Sales Outstanding Formula would be determined as follows:
365 days x ($150,000 / $1 million) = about 55 days
You may be pleased with this performance if you operate on net 60 payment terms. However, you should look into this if you anticipate receiving payment in a month or fewer. But it’s truly consuming an average of 55.
The Significance of Observing DSO for a SaaS Company
For B2B SaaS firms to be financially stable, monitoring is essential. It will be simpler to identify cash flow issues early and take action before they begin to affect your operational efficiency. If you’re more aggressive in tracking times to collect.
You may find yourself unable to keep up with business development. If your typical amount of AR doesn’t match the amount of money required to operate your organization.
DSO facilitates the adoption of the “cash is king” mentality by SaaS finance professionals when combined with a statistic.
- Boost the Management of Cash Flow
Learn more when you see increased trends. So that you may work with your accounting and customer relations partners to remedy problems.
- Evaluate the Credit Risks of Customers
Businesses may more accurately evaluate the credit risk of their customers by examining variations. An upward trend might indicate that your consumers are having trouble paying on time. Or that there are issues with your collection procedure.
- Assess Your Performance
You may acquire important information about how well your business is functioning. In comparison to expectations by comparing to internal and SaaS standards – read https://discoveringsaas.com/industry-guides/finance/ for more info.
Although it’s beneficial to include the context to use as a baseline. You don’t want to over-index around rival benchmarks.
- Enhance the Processes of Billing and Collection
By routinely keeping an eye on your company’s DSO. You may spot inefficiencies in your invoicing processes or collections tactics that require work. This will eventually result in quicker payment cycles and better cash flow.
What’s meant by a high Day Sales Outstanding?
When a business has a substantial day sales outstanding. It means that it takes longer to get money from clients after a transaction is completed. This might affect your B2B SaaS startup’s cash flow and financial stability in some ways:
- Adverse effect on cash flow.
Having unpaid bills indicates that funds are being held in AR rather than being accessible as liquid assets. This may make it difficult to invest in expansion prospects or pay for operating costs.
- Collecting ineffective procedures.
This might indicate inefficiencies in your collections and invoicing operations. This could be brought on by human processes or the absence of automation. As well as inadequate client communication about expected payments.
- Possible problems with credit risk.
If customers often take longer than anticipated to pay their bills. This might be a sign of possible credit risk issues. Stricter regulations or a reassessment of consumer credit conditions may be required in certain situations.
What does a low DSO mean?
It’s typically seen as a sign that your accounts receivable procedure is doing well. It indicates that your business can promptly collect payments from clients following purchases.
Better cash flow – look at this, and liquidity may result from this. Thus, making it easier for the company to pay for operations or spend on expansion plans.
Along with great coordination between you and your clients over price and payment procedures, it can also signify a strong handoff through your deals staff to customer success. A corporation may suffer from low DSO for some reasons:
- Effective procedures for collecting and invoicing.
Reducing this may be greatly aided by a well-run billing system that immediately sends out invoices. Also, follow up on past-due payments.
- Favorable conditions for payments.
Customers may be encouraged to settle their bills earlier if you offer them enticing payment options. Like early-payment incentives or shortened due dates. This will reduce your day sales outstanding.
- Selective clientele.
Maintaining a short average collection period can be achieved. It’s by focusing on clients with solid credit histories and a history of on-time payments.
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