Are you tired of riding the DSO roller coaster? Tired of wide swings in DSO as sales spike or hit a seasonal pattern? Tired of having to explain why you missed your DSO KPI again? Well, you are not alone. DSO is a very commonly used indicator of the quality of accounts receivable, but it has serious limitations. It may be time to ditch DSO and consider better alternatives for assessing the quality of your accounts receivable.
What DSO Is
DSO or Days Sales Outstanding is the ratio of current AR to average daily sales for the past year. So if current AR is 30K and sales for the past year were 365K, DSO is:
30/(365/365) = 30 days
But if sales spike 30K in the last month, DSO increases considerably even though the quality of AR has not really changed.
60/(395/365) = 55 days
Clearly DSO is not telling the real story.
Why DSO Doesn’t Work Well
DSO can produce misleading information, and it doesn’t provide insight into the details underlying the changes in accounts receivable.
- Easily affected by sales swings and seasonality.
- High-level measurement used when you don’t have details.
- Doesn’t work well for individual collections process.
There are alternatives to DSO which give you a snap shot of the quality of your accounts receivable, details to facilitate follow-up action, and the cost of credit to identify priorities.
Average Days Late
Automated accounts receivable with Average Days Late features provides details on past due accounts for collection follow up.
- Focus is on days late by account. It is more useful than Average Days to Pay. Easy to identify and prioritize problem accounts for collection.
- Uses history to indicate when customer typically pays. Helps to avoid wasting time on accounts which are slow pay but not real collection problems.
- Used to identify invoices that fall outside typical payment pattern. Pinpoints potential problems for follow up.
- Provides comparison of Average Days Late vs Average Days Late weighted to help identify follow up priorities.
Cost of Credit
Cost of Credit features provide insight on the cost of providing credit to help prioritize collection efforts so they are focused on the highest return opportunities.
- Provides a “Real World” aged value of outstanding invoices.
- Compares Cost of Credit Balance vs Cost of Credit Late to help prioritize collections.
- Highlights that next best task so collection efforts are focused on the highest returns.
The time to ditch DSO is now. Average Days Late and Cost of Credit features in automated accounts receivable can provide better indicators of accounts receivable quality and account level detail to help prioritize your collection efforts.
The key to successful automation of accounts receivable and collections is to work with an experienced software partner.
Anytime Collect is a market leader in cloud-based credit and collection platforms. Anytime Collect can help you automate your accounts receivable and ditch DSO.
If you would like learn more about how you can benefit from automation of accounts receivable and collections, please contact Anytime Collect at www.anytimecollect.com.