If you are a business owner, you may have heard of the term DSO, which stands for Days Sales Outstanding. DSO is a measure of how long it takes for a company to collect payment after a sale has been made. Essentially, it is the average number of days that it takes for a company to convert its accounts receivable into cash.
DSO is an important metric for businesses because it impacts cash flow, working capital, and profitability. If a company has a high DSO, it means that it is taking longer to collect payments, which can lead to cash flow problems and limit its ability to invest in growth opportunities. On the other hand, a low DSO can free up cash and allow a company to invest in its operations.
How can you reduce your DSO and get paid faster? Here are some tips
- Invoice promptly: One of the simplest ways to reduce your DSO is to send invoices promptly. The longer you wait to invoice a customer, the longer it will take for you to get paid. Make sure that your invoices are accurate and include all the necessary details, such as payment terms and instructions.
- Set clear payment terms: It is important to be clear about your payment terms with customers. This includes the payment due date, any penalties for late payment, and any discounts for early payment. Make sure that your customers understand your payment terms before they make a purchase.
- Follow up on overdue payments: If a customer is late in making a payment, don't hesitate to follow up with them. This can be as simple as sending a reminder email or making a phone call. Often, customers may have forgotten about the payment or are experiencing their own cash flow problems. A gentle reminder can often be enough to get the payment processed.
- Offer payment options: Make it easy for customers to pay you. This can include offering a variety of payment options, such as credit cards, PayPal, or bank transfers. Consider using an online payment system that allows customers to make payments quickly and easily.
- Consider factoring: Factoring is a financial transaction in which a business sells its accounts receivable to a third-party company (known as a factor) at a discount. This can provide a quick influx of cash and reduce the risk of non-payment. However, it can be an expensive option and should be considered carefully.
Reducing your DSO is an important part of managing your cash flow and ensuring the financial health of your business. By following these tips, you can get paid faster and invest in the growth of your business.
DSO statistics related to the UK market
- The average DSO for small and medium-sized businesses in the UK is 46.7 days. (Source: BACS)
- Late payments are a major issue for UK businesses, with 62% of businesses reporting that they have experienced late payments in the past year. (Source: Sage)
- According to a survey by YouGov, over a third of UK small and medium-sized businesses are waiting on £20,000 or more in overdue payments. (Source: YouGov)
- The UK government has launched a new Prompt Payment Code to encourage businesses to pay their suppliers promptly. As of April 2021, over 3,000 businesses had signed up to the code. (Source: UK government)
