What is DSO?

Video Transcript

Hi, Angus Sedgwick from OptiPay here and in today’s video we’re going to look at DSO, what it is and why it’s an important metric to understand within your business. So what is DSO? DSO or Days Sales Outstanding also known as Debtor days, is a measure of how quickly you get paid for the goods or services that your business delivers to your customers on credit terms. Simply put, it’s the average number of days it takes to collect your invoices. DSO can reveal a lot about the financial health of your business. A longer number of Debtor days may mean that cash is in short supply within your business, and therefore you may miss out on growth opportunities. It’s worth comparing how your Debtor days compare with your payment terms. If you have credit terms of 30 days, but your Debtor days are 60, that means it takes twice as long for debtors to pay your invoices than you have agreed to allow them. Debtor days for company is driven by a number of different factors. The industry you operate in plays a big factor as believe it or not, each industry has an “accepted” norm for late payments. So as a business owner, what are some of the strategies used to managing DSO. The key strategy is to actively manage your debtor book – by following up on invoices after sending them to ensure they have been received and are in your debtor’s accounting system for payment. Then a few days before due date, send a reminder email. If the invoice is not paid on the due date, send a reminder email that the payment was missed and to please make payment. If the invoice remains unpaid after two weeks, send a final email requesting payment otherwise you may commence recovery action. Obviously, there’s a commercial consideration to how aggressively you want to manage and follow your customers. But don’t underestimate the impact on your business of allowing your DSO days to extend. Or another alternatives is you may look to use invoice financing to bring forward the cash flow from your debtor’s ledger to use it in your business immediately after making sales. In the current climate, it’s inevitable that some businesses will get paid later and your customers will pay slower, so it can be useful not only to track how your Debtor days have changed, but also be active with debtor management to help mitigate the potential impact on your business.

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