How Embedded Financing Helps Lower Your Days Sales Outstanding (DSO)

Calculating your company’s days sales outstanding (DSO) can create meaningful insights to support your business strategy. Your DSO tells you the average time it takes to collect payment after a sale. With a simple number, you can learn more about your sales team and the sales cycle, your customers and their buying abilities, and your industry and the effect of seasonality. 

Better understanding your DSO will help you manage cash flows, know when to offer flexibility in payment terms, and reduce overall financial stress. 

Understanding Days Sales Outstanding 

What is Days Sales Outstanding (DSO)?

The days sales outstanding ratio is a working capital ratio that measures the number of days it takes for a company on average to collect funds on its accounts receivable. A low DSO number can indicate that a company collects payment from its customers quickly, and can be interpreted as having a healthy sales and closing cycle. A company that can convert its contracts into cash sooner is capable of maximizing its cash flow more effectively.

Measuring a days sales outstanding ratio can be used as an indicator of a company's performance and an early warning signal if the DSO ratio begins to climb rapidly or increases over the company average.

How to calculate your days sales outstanding ratio (DSO)?

The DSO formula:

Days Sales Outstanding (DSO) = (Accounts Receivable/Net Credit Sales) x Number of days

An example:

During the last three months of the year, your company made a total of $2,000,000 in credit sales and had $1,000,000 in accounts receivable. The time period covers 90 days. Your company’s DSO for that period is calculated as follows:

1,000,000 divided by 2,000,000 equals 0.5.

0.5 multiplied by 90 equals 45.

The DSO for this business in this period is 45.

DSO = (1,000,000/2,000,000) x 90 = 45

This means that it takes approximately 45 days to receive payment on your credit sales.

What's considered a low DSO and a high DSO?

The industry average days sales outstanding ratio is considered to be 36.6. Taking this into consideration, anything below 36.6 is considered a low DSO, and anything above 36.6 is considered a higher DSO.

Determining a Healthy DSO Score for Your Business

Although the industry average for a days sales outstanding ratio is 36.6, this doesn't always meet expectations if you have longer repayment terms with your customers. If you expect your customers to fully repay within 90 days and you have a DSO ratio of 62 then you're well within the repayment time period and are probably maintaining a healthy cash flow.

A DSO Ratio of Zero

There are circumstances where a DSO number can be zero. This occurs when sales aren't classified as credit sales. Cash sales have a DSO of zero because they don’t affect account receivables and the time it takes to recover payment. This is common in retail where you purchase an item instantaneously or if you sell a solution that is only accessible after full payment is received.

What does a low DSO mean?

A low DSO value can be interpreted as a company having a successful collections process where they're efficient at collecting outstanding payments. A company with a low DSO might have techniques to encourage timely repayments of customer credit, like early payment discounts, annual contract discounting, or leverage embedded financing solutions like Gynger.

What does a high DSO mean?

Ultimately a higher DSO number reflects that a company is waiting a long period of time to receive funds for its credit sales. When a DSO number is higher a company needs to be mindful of its cash flow and ensure that it has enough runway in the bank to mitigate costs until payment is received for its services or products.

Tactics to Lower Days Sales Outstanding (DSO)

If your company has a high DSO number and you are concerned about cash flow there are some techniques you can apply to streamline your collections process and improve your accounts receivables.

Investigate customer finances

When conversations begin with a new prospect, it is valuable to conduct some investigation into their financial health, especially before a large credit sale commitment. Ask further questions on how a customer is preparing to make repayments and what their budget allocations are for this solution. Investing in a soft credit check technology or financial research tool will bring peace of mind to your finance and collections teams.

Mitigate customer repayment concerns

Make the purchasing process simple for customers and include clear breakdowns of what services and products your customers are receiving in relation to their payment summaries. Customize repayment terms for the customer that are suitable for both your company and their financial needs. When it comes to paying invoices and bills, let the customers pay in multiple ways with a click of a button or recurring payment setup. With Gynger you're able to offer your customers customized re-payment options when you previously couldn't. Partnering with Gynger we can assume the risk while ensuring you get paid upfront. 

Discount for upfront annual commitments

Annual commitments from customers already have the benefits of better packaging and product offerings. If a discount is also included as an incentive it can stimulate quicker repayment. Negotiate an early payment discount when customers commit to payment terms that are preferable to your collections procedures.

Analyze historical payment trends

A company's sales outstanding ratio can also be affected by seasonal changes. Leading up to the end of the quarter or end of the year, a sales team can offer a broader range of repayment terms or your product may be affected by seasonal sales and trends. During these times the finance team and sales team must communicate clearly and agree upon the set boundaries so that the fluctuating DSO metric can be explained to financial teams, investors, and leadership.

How to Lower Your DSO Score with Embedded Financing Technology 

The tactics to lowering your DSO ratio often involve creating new processes and building new strategies. They can also require different financing and payment tools. Financial products and offerings aren’t the core competencies of your business, so you don’t have to build it yourself. Embedded financing tools can do the heavy lifting of lowering your DSO. 

Simplify pre-qualification

With embedded financing technology, your provider can handle the pre-qualification for you. You won’t need to stress about gathering all of the right details up front or managing a credit check solution. Instead, your software should be able to handle it all for you, decreasing risk and helping you properly prioritize deals. As you sync your CRM accounts or manually add them, technologies like Gynger pre-qualify your accounts to give you better insights into your customers.

Diversify payment options and terms 

In general, flexible payment terms allow your customers to choose payback periods that fit their business and financial needs. Embedded financing tools can support your business in offering these different deal terms. Gynger pays you your full contract amount instantly while still providing your customers with preferable payment terms to help close the deal faster. You can offer your customers net terms or monthly terms easily customizable within the Gynger Vendor App.

Automate billing and collections

Some financing technologies only facilitate the payment and the collections remain the responsibility of the company. When you offer embedded financing to your customers using Gynger as soon as the customer is qualified for financing and accepts the terms your company is paid directly the full sum of your contract amount. The customer re-payments are then managed by Gynger removing any collections or repayment concerns.

Achieve a Healthy DSO Metric with Gynger

When it comes to maintaining and lowering your days sales outstanding and having an improved cash flow leveraging a flexible financing platform like Gynger ensures your success.

DSO = 0

Receiving payments instantly after your customer accepts your terms reduces your DSO value to zero.

Fast cash conversion cycle

Cash is instantly deposited within your bank accounts. This means your company has a higher level of financial health, superpowering your cash flow management.

Simplified accounts receivable management

Gynger manages the complete collections process on the customer side. No more leveling the balance sheet and chasing late payments.

To reduce your DSO score, close larger deals, and establish improved cash flow explore Gyngers Vendor Platform.