It is known in French as NJC (Nombre de Jours de Crédit client) or DMP (Délai Moyen de Paiement clients). Days Sales Outstanding is an essential component of trade receivables.
How many days does it take on average for a customer to pay their debt to your company? More than just an accounting figure, DSO is a cash flow variable and one of the three components of Working Capital Requirement (WCR). How can you understand, calculate and improve this vital financial indicator?
What is DSO (Days Sales Outstanding)? ?
Definition of DSO
Behind this acronym lies one of the levers of your company’s sound financial health. Days Sales Outstanding is the time taken to pay and/or collect your trade receivables.
Also known as DMP or average payment period, DSO represents the number of days between the issue of your invoice and its payment by your customer.
This may be the contractual period, agreed as part of a credit sale, an agreement or legal periods (from 30 to 90 days from invoicing). But DSO also takes into account late payments, which sometimes require the collection of trade receivables.
Want to calculate your DSO? Download our DSO calculation Excel file to calculate your DSO automatically using the accounting method or the exhaustion method.
How should DSO be interpreted?
DSO is an indicator whose interpretation is important in customer risk management. That’s why it needs to be monitored regularly.
A high DSO means that your customers take a long time to pay, either by convention or because they are bad payers. Regular delays in the payment of your receivables have a detrimental effect on your company’s financial capacity.
The term DSO dispute is used when payment delays are due to claims or disputes, whether justified or not, on a given invoice. It is estimated that 40% of late payments are attributable to such complaints. This is a substantial DSO, but one which the creditor company can control.
Conversely, rapid recovery of trade receivables will enable the company to improve its cash position and thus limit its WCR (Working Capital Requirement).
As a reminder, WCR is the amount needed to bridge the gap between receipts and expenditure, and thus cover your operating costs.
Did you know that by using collection software you can reduce your DSO?
DISCOVER OUR DEBT COLLECTION SOFTWARE
How do you calculate average customer payment times?
The different methods for calculating DSO
There are two methods of calculating Days Sales Outstanding: the accounting method and the sales depletion method. While the first is simpler, it does not take account of the seasonal nature of certain activities and may be less relevant. In this case, we recommend the count back method.
Calculating DSO: the accounting method
It’s the easy way! To find out your average customer payment period, simply apply the following formula over a given period:
(Trade receivables incl. VAT / sales incl. VAT) x number of days in the period.
This gives you your DSO in days: this calculation assumes that there is a certain regularity in your company’s activity and monthly turnover.
Here’s an example:
A company has a turnover of 120,000 euros and 40,000 euros in trade receivables over a period of 6 months. Its DSO is therefore :
(40,000 / 120,000) x 180 = 60 days
Calculating DSO: the count back method
This more complex method of calculating DSO is also more accurate when your business is subject to seasonal fluctuations. It involves subtracting outstanding receivables from sales, month by month. This calculates the number of days’ sales needed to absorb all the receivables.
Here’s an example with figures:
On 1 March, your trade receivables amounted to €30,000.
In March, which counts 31 days, your company’s turnover (including VAT) was €17,500. Your remaining customer receivables are 30,000 – 17,500 = 12,500 euros.
In April (30 days), your company achieves sales of €10,000. You therefore have 12,500 – 10,000 = 2,500 euros in trade receivables to absorb.
In May (31 days), your turnover is €8,000 (with outstanding receivables of €2,500). You need to calculate how many days it will take for your outstanding receivables to be used up using the formula (outstanding receivables / turnover) x number of days in the month. You get (2,500 / 8,000) x 31 = 9.69 days. Your outstanding balance was therefore exhausted on 10 May.
Over the past period, your DSO or DSO is therefore 31 + 30 + 10 = 71 days.
What is the difference between DSO and DPO?
While the DSO represents the average time taken by your customers to pay their debts, the DPO concerns your ability to pay your own suppliers.
DPO, or Days Payable Outstanding, calculates the number of days your company needs to pay its suppliers’ invoices. The correlation between DSO and DPO is obvious, since, like DSO, Days Payable Outstanding has a direct impact on a company’s cash flow and on WCR.
What is the ideal combination for your company’s financial health? Having short customer payment terms and a long DPO (because you’ve negotiated well with your suppliers, not because you’re paying late!) helps to limit your WCR and your demands for short-term credit.
What’s more, in a tense economic climate, extending supplier payment terms seems to be the preferred variable for limiting cash flow pressures. These are the findings of a survey carried out before the summer by the business law firm ARC, and reported by Le Parisien. 72% of the companies surveyed would consider offsetting the lengthening of the DSO with that of the DPO.
Why monitor your DSO?
Companies need to monitor their DSO to ensure they are in good financial health, and to understand, analyse and manage customer risk.
Monitoring your DSO, either overall or by customer, enables you to quickly detect any payment difficulties leading to its deterioration.
Monitoring also enables you to understand the origin of payment periods and identify those that can be shortened, such as DSO disputes, using a software solution such as the CashOnTime platform. In this way, your company can be proactive in collecting its receivables, limiting its management costs and tying up its resources.
It can also anticipate cash flow pressures and take advantage of other levers for controlling WCR, such as DPO or stock rotation management.
Finally, good management of your accounts receivable and payable ensures that you maintain a healthy image with your partners.
How can you reduce your company’s customer payment times?
Some figures on DSO in France
The Covid-19 pandemic has had a significant impact on the DSO of French and European companies. According to the Atradius European Payment Practices Barometer for November 2020 and November 2021, 90% of French companies have seen their DSO deteriorate.
Late payments have become commonplace, with 48% of B2B invoices unpaid. In terms of customer payment times, the average DSO in France at the end of 2020 was 52 days, compared with a European average of 44 days.
Levers for reducing DSO
It is therefore imperative to find the levers needed to reduce the time taken to collect trade receivables. There are several ways of doing this:
- In advance, give preference to short-term payment terms or request payment on account.
- Use receivables financing (Dailly, discounting, factoring).
- Set up a regular and proactive customer reminder system.
- In the event of late payment, optimise your dispute management and debt recovery processes. This involves identifying the DSO of the dispute, which the company can influence. By quickly detecting overdue invoices resulting from complaints, it is possible to provide a solution, so as to settle the dispute and obtain payment more quickly.
That’s what our complete CashOnTime solution offers you. Initially, the Allocation service will assist you with the accounting management of invoice payment. In the event of unpaid receivables, our Collection service takes over. By monitoring outstanding receivables, payment terms and risk assessment, you can move forward with complete peace of mind to optimise your DSO and your DSO for litigation.
Our experts are on hand to give you personalised advice: so don’t wait any longer to make it easier to monitor and collect your receivables, and give your company’s finances some breathing space!
Discover CashOnTime
