You might be saying DSO, what is that? DSO stands for Day’s Sales Outstanding, it is a financial measurement you can use in the financial management of your business.

DSO is an indicator of how effectively you are collecting your receivables, or more simply put, how timely you are being paid and bring cash into your company. Here is how you calculate it.

Take your companies monthly revenue, divide it by the number of days in the month, that tells you what your daily revenue value is. Say you had $90K per month in revenue, in a 30 day month that would be $3K per day.

To calculate your DSO take your total current receivables and divide by your daily revenue number. For example using the numbers above: Let’s say your total receivables are $220K, divide that by $3K and you have 73.3 days of revenue yet to paid. Your DSO would be 73.3 which means your invoices are taking about 73 days to be paid.

The question is, is that a good number or bad, it depends. Here are some questions to ask yourself:

• If my terms are Net 30 why is it taking so long to collect payment?
• Do I have a defined collection process with actions that are time driven?
• Do I make my payment terms and process clear to my customers at the time of purchase?
• Are there large invoices that are skewing the DSO?
• Exactly who are the slow payers and why are they slow?
• Are my customers paying slow because they are unhappy with by products and services?

What this really gets to is cash flow, in the case above if you could reduce the DSO number to 60 that would $39K of cash flow improvement to the business. Cash flow improvement is a critical measure for most of us.

Even if your business is not this large, monitoring your DSO on receivables may be even more critical as you probably have fewer invoices and the cash flow of getting timely payment may be more critical to the success or even survival of your business.