While Standard DSO measures current and overdue invoices, Best Possible Days Sales Outstanding (or Best DSO) measures only current invoices. Tracking the delta between Best DSO and Standard DSO will ensure that you are optimizing your business’ account receivable (AR) management practices and help identify opportunities to improve cash flow. Quarter-over-quarter or year-over-year reductions in this delta is a key performance indicator (KPI) of AR improvement - and the financial health of your company.
Standard DSO vs. Best Possible DSO
To track both, your AR team will need to do two different calculations:
- Standard DSO calculates the average time it takes to receive payment on an invoice. Standard DSO = (ending total receivables / total credit sales) x number of days. If your Standard DSO is 45 days, then customers typically take 45 days to pay their invoice.
- Best DSO uses only your current (not yet past due) receivables and tells you what your best “on-time payment” turnaround is going to be. Best DSO = (current receivables / total credit sales) x number of days. If your Best DSO is 15 days, this means your on-time customers typically pay their invoice within 15 days of receipt.
Your goal should be to get your Standard DSO as close as possible to your Best DSO in order to have a healthy cash flow and to ensure your AR management is as efficient as possible. Having them match exactly is rarely feasible, so a good goal would be to have your standard DSO fall within 20% of your Best DSO.
Key Things to Remember about Standard and Best Possible DSO
1. These two primary DSO calculations can be affected by short-term fluctuations in sales or collections. Businesses should compare DSO to previous quarters or annually to reduce the risk of outliers or non-standard fluctuations affecting the accuracy of their DSO and Best DSO calculations.
2. DSO takes into account only credit sales, not cash sales. A business with a significant portion of cash sales may not want to use DSO to analyze cash flow and forecasting.
3. You can reduce the delta between your Standard DSO and Best Possible DSO by improving your business’ AR policies and overall AR management.
YayPay’s advanced AR analytics, comprehensive payment and communication history, and automated communication features can help your AR team bring your business’ Standard DSO closer to your Best Possible DSO. Talk to the YayPay team today!