What is DSO? What is its calculation formula? Join BV247 to learn about the Customer Retention index in the article below.
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I. What is DSO?
Days sales outstanding (DSO) can be described as the average number of days that accounts receivable (customer fees, invoices, payments) remain unpaid before they are collected.
A DSO not only shows how well your company’s accounts receivable is being managed, but it also shows how committed customers are to maintaining a healthy partnership with your business.
The longer the DSO, the longer it takes customers to pay their bills – which can bode well for your customer retention strategy.
Well, it’s important to look at DSO as a whole to identify trending behaviors and what you can do to combat rising DSO metrics.
But on an individual basis, a long DSO could mean that your customers are unhappy with your company’s products or services, or that your Marketing and sales team is nurturing and closing customers with problems. credit or cash flow issues. Remember, effective customer success strategies begin before the acquisition phase.
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See about other metrics that measure Customer Retention:
Time Between Purchases
II. What is the formula for calculating DSO
DSO is more commonly applied to an entire set of invoices for which a company has outstanding amounts at any given time than to a single invoice. You can determine your DSO monthly, quarterly, or annually by dividing the number of accounts receivable for the selected period by the total value of credit sales for the same period – and then multiplying the result by the number of days where the timeframe.
The final figure equates to the average number of days your company takes on an invoice. But for the sake of simplicity, the annual DSO formula can be found below.
Number of unpaid semi-annual days = (Receivables / Annual Sales) × 365 days
Days sales outstanding example
Let’s say our hypothetical company made VND100 billion in revenue this year. Out of that 100 billion VND, 75 billion VND was collected.
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In this case, our annual DSO would be 274 days
((75 billion VND / 100 billion VND) x 365 days = 274 days)
and our monthly DSO will be 23 days
((75 billion VND / 100 billion VND) x 31 days = 23 days)
That can be low or high depending on the industry you’re working in.
III. How to use Days sales outstanding effectively
To make the most of the Days sales outstanding metric, you need to chart it annually, quarterly, or monthly. You will have an overview of the movements of accounts receivable in your business.
However, the Days sales outstanding metric only tells you about the customer’s receivables on invoices. You need to learn and combine with other metrics to evaluate customer loyalty and the relationship between your business and your customers.
The DSO Index is essential for investors. They can know the debt situation of the business. Should they decide to buy the business and improve the situation?
While looking at an individual DSO value for a company can provide a good benchmark for a quick assessment of a company’s cash flow, trends in DSOs are much more useful than individual DSO values. If a company’s DSO is growing, it could indicate a number of things. It is possible that customers are taking longer to pay their expenses, indicating a decline in customer satisfaction, salespeople in the company are offering longer payment terms to increase sales sales or companies that are allowing customers with poor credit to make purchases on credit.
With the article on What is DSO? Days sales outstanding is an important indicator of customer satisfaction with your product or service? In particular, this index is suitable for investors when they want to invest or buy a business.
There are many other metrics that help evaluate your customers. Find out right in Blog BV247.