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Understanding the Importance of Daily Sales Outstanding

Daily sales outstanding or DSO denotes the gap between the date of sale or delivery of goods and the receipt of the payment. DSO helps business owners understand where the business or the company currently stands. It helps business owners to identify or classify their customers according to their payment patterns. The daily sales outstanding give an overview of the cash flow requirements of the business and a fair idea about the performance of the business. It is the basic and primary metric any business uses to evaluate its organization’s working capital requirements.

What do you mean by Daily Sales Outstanding (DSO)? 

Daily sales outstanding DSO refers to the measure that helps the company determine its sales payment. Daily sales outstanding are often calculated on the following basis:

  • Monthly
  • Quarterly
  • Annual

DSO is calculated by dividing account receivables by the total net credit sales during a certain period. Then, the number obtained is multiplied by the number of days in the period. 

Daily sales outstanding is of two types: a low DSO and a high DSO. If the result is low DSO, it means a company or a business takes some days to gather its receivables, and if the result is high DSO, it means that the business will take more days to receive or collect its receivables. High DSO will lead to cash flow problems in a business eventually. 

Indications of a high or low DSO

A high DSO illustrates that a company or a business is experiencing a challenging time while converting its credit sales to cash. Depending on the business type and its financial structure, a high DSO like 60 may not be a grave issue for a company with large capitalization. 

However, for a small-scale organization, it would be a matter of concern, as it can severely lead to problems in fulfilling the business’s working capital requirements. 

Smaller businesses generally depend upon quickly collecting receivables as smaller businesses need cash flow for daily operations.  

To solve the issues of high DSO, a company must decide what factors are affecting its sales and growth. For example, a business is not efficient in collecting its receivables. 

On the other hand, a low DSO is more favorable to a business collection process. This is because customers often pay on time to enjoy or benefit themselves with heavy discounts. 

However, low DSO benefits small or medium-scale businesses as it carries added benefits. Receivables collected by small-scale businesses help them to reinvest to promote its sale and future growth. 

The formula for calculating daily sales outstanding: DSO = accounts receivables/ net credit sales * number of days 

Importance of Daily Sales Outstanding 

Daily sales outstanding is most important for a business to measure its liquidity and cash flow position. Cash (working capital) is the basic need for a business to run, so it must collect its receivables as quickly as possible. 

Daily sales outstanding is a metric used by numerous businesses to evaluate if the business credit and collection efforts are efficient and effective. It shows how quickly a business can recollect its account receivables and reinvest that money into the business for further sales and growth. 

Daily sales outstanding can also be used to measure or monitor individual customers’ payment patterns. This helps the business identify whether the cash flow with the customer is good. 

Daily sales outstanding is a reliable measure of healthy customer relationships. Businesses with good cash flow may indicate that they have been protected from payment delays and defaults by credit insurance. Using the DSO metric might inform the business of changing its credit or payment patterns. 

Methods to lower Daily Sales Outstanding

The business or company owners can use any one of the following techniques to lower daily sales outstanding for their business to gain good profits. Some of the methods to lower DSO are: 

  1. Minimizing the use of credit cards can lower DSO as declining payments are made via credit cards. 
  2. Provide incentives on cash – offering customers a discount if the payment is made in cash will help lower the DSO of the business.  
  3. Identification of delayed payments- the small-scale business owner can also make a list of customers with delayed payments and even place certain restrictions on them. This will force the customer to buy the products with cash next time. 
  4. Do a verification for credit background checks – the business owners can even perform a check on the credit card payment of a customer before allowing him to do the transaction. 

However, there could be buyer power and negotiable leverage in some scenarios. As the business partially depends on the customer, the industrialist has to extend their payment dates to survive in the business market.  

As a result, sometimes, to maintain a good customer relationship, businesses have to grant extended periods for payments to the customer. This can only be done when customer relationships are long-term and trustworthy. 

Simplify and collect faster

Now you can simplify bulk collection with a few simple steps. English is here to help you lower your DSO and collect faster. Their experienced team is concentrated on making the complete process of collections customer-focused and improving the experience while ensuring better DSO.

Contact EnKash to ensure a positive customer experience and faster collections with accuracy and timeliness of invoicing. For more details, you can visit their website.                 

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