Metric of the Month: Days Sales Outstanding

Managing the days-sales-outstanding metric can be a good step to maintain the capital needed for growth.

October 2016 Days sales outstanding 5804ef7256642

Days sales outstanding (DSO) is calculated as 360 days divided by the ratio of net sales, divided by the average month-end trade accounts receivable balance (excluding all unbilled receivables). It is a quick, high-level measure of the state of an organization’s receivables. A high number of days could indicate problems receiving prompt payment from customers. A low number of days sales outstanding indicates a more efficient business.

As shown in the graph, American Productivity and Quality Center’s (APQC’s) Open Standards Benchmarking in supply chain planning shows that bottom performers have a DSO of 52 days, whereas top performers cut their DOS almost in half to 29 days. Managing DSO can be a good step to maintain the capital needed for growth. In addition, a lower DSO often results in a decrease in uncertainty for the supplier, who can be more confident in its financial standing and ability to fill the necessary orders.

Organizations can improve DSO using a two-pronged approach: Identify first the internal and then the external problems that affect a customer’s ability to pay. Internally, organizations should address invoice errors, which can delay how promptly a customer receives a correct invoice. Externally, organizations should conduct both customer and customer-segment analysis, particularly on high-value customers. By examining the payment histories of major customers and customer industry segments, as well as external developments that may affect customers in the future, organizations gain a clearer picture of which customers are slow to pay and which have the potential to become so in the future.