When you are managing your finances as an entrepreneur, you often come across terms that are crucial to understanding the health of your business. One such term is ‘DSO,’ which stands for ‘Days Sales Outstanding,’ or the average day’s sales in outstanding accounts receivable. Combined with factoring, a financing solution for businesses, understanding DSO can help you get a grip on your cash flow and payment cycle.
What is DSO?
DSO is an important financial measure that indicates how long, on average, it takes your business to receive payments for the sale of products or services. In other words, it measures the time that elapses between the moment of sale and when payment is actually received. A low DSO indicates that your customers generally pay quickly, which has positive implications for your cash flow and liquidity.
Why is DSO important?
Efficient cash flow is vital to the success of any business. The faster your outstanding invoices are paid, the more financial room you have to invest in growth, cover operational costs, and seize opportunities. A high DSO can indicate problems such as slow payments, inadequate accounts receivable management, or even financial difficulties with your customers.
How do you calculate DSO?
Calculating DSO is quite simple. Follow these steps:
Determine your average debtor balance; this is the total amount of outstanding invoices over a given period, e.g. a month.
Divide the average debtor balance by turnover. This gives you the average DSO. You do this the following way: (average debtor balance/total turnover) x number of days in the period.
For example, if your average accounts receivable balance over a month is €10,000, your total turnover in that month is €50,000, and there are 30 days in that month, then your DSO is: (€10,000 / €50,000) x 30 = 6 days.
DSO and Factoring
Factoring is a financing option where a company sells its outstanding invoices to a factoring company – in this case, Factris – after which you are paid the value of the invoice at short notice. This allows companies to receive immediate cash for their invoices instead of waiting for the customer to pay.
By using factoring, companies can improve their cash flow and shorten their DSO. This is because the factoring company becomes responsible for collecting payments, leading to faster access to cash. This allows business owners to focus on their core business without worrying about long outstanding invoices.