The Importance of Days Sales Outstanding for SMEs

As a small business days sales outstanding (DSO) is arguably one of the most important measures to keep track of. It indicates how many days on average it takes for you to receive payment once a sale has been made. DSO can be calculated by dividing your accounts receivable by the amount of credit sales made and then multiplying by the number of days in that period.

If an SME is able to keep their DSO low, roughly 45 days or less, there are many benefits such as quicker turn arounds and more readily available funds for future endeavours, allowing the company to expand or take on more risk. This also means that in real terms the value of the money quickly collected may be greater than money stuck in limbo for lengthy periods of time.  

Alternatively if you tend to have a higher DSO your business is more likely to struggle with cash flow related issues. The more time that goes by since you were owed payment, the greater the opportunity cost becomes. You are also technically doing more work since a higher DSO means you need to spend more time trying to collect, or you may even need to begin outsourcing collections to avoid retrieving payments of far less than you are owed. This can come with a fee paid to collection agencies, that is if they are able to collect at all.  

The Federation of Small Business found that an estimated 50,000 small businesses fail each year purely because of cash flow issues. This goes to show the importance of staying on top your DSO which not only will affect your cash flow, but may also begin to deteriorate your credit score. For SMEs this is less than ideal with a direct impact on future plans that may require being loaned funds and also reduces it’s appeal for other companies to work with.

Xero found that in terms of late payments, on average small businesses in the UK are owed £24,841 which has a shockingly adverse effect on productivity and means collective economic performance and SMEs are not where they might be, should this problem be resolved.

 

About DialogWise:

We are building a rare win-win business: SMEs are able to instantly recover late invoices using our platform to access world-class collection agencies, late payers select instant payment plans and issue resolution and collection agencies gain a new revenue stream using simple integration.

 

https://www.xero.com/uk/resources/small-business-insights/challenging-the-late-payments-culture/