I recently mentioned the “DSO” statistic at a meeting of sales managers and was not surprised to see many blank faces staring at me in return – they had no clue what the statistic is or what impact it has on their business, even though most of them were also owners of their businesses.

Most are unaware of the fact the DSO figures of a business can become a key component in loan analysis. When the entrepreneur attempts to obtain major financing, the rate at which the entrepreneur can get paid by his customers becomes a truly telling statistic as a measure of how well the business can meet those monthly payments to the lender! The lower the DSO the easier it becomes to meet the monthly obligation of the loan payment.

DSO Defined

The acronym stands for “Days Sales Outstanding” and it represents the cost of carrying uncollected accounts receivables on the books of a company.


The cost of carrying accounts receivable

Now let’s look at your business. Let’s say you know that the average amount of time it takes to collect the money owed to you is 90 days.

Where :

  • Your Total Receivables = $25,000.00
  • Interest Rate = 3.25% (0.0325)
  • DSO = 90 days

25,000 * 0.0325 = 812.50

812.50/365 = 2.23

2.23 * 90 = 200.70

Therefore, it is costing you $200.70 in interest every 90 days (or $812.50 annually) to provide your customers with credit facilities on $25,000.00. This example uses modest figures.

However, is that “normal” compared to others in your industry? If you belong to a trade group, it’s possible your group will have published statistics on the DSO averages for your industry. You can also go to the following page for the Credit Research Foundation:


Even if your statistic is “normal”, do you think it can be improved? I’ll bet it can be improved by some simple common sense steps:

  1. Most important is to adopt a regular program of follow up of your receivable accounts. That means placing a telephone call to the customer.
    1. First call is a friendly customer service type phone call or visit to find out how everything is with the product or service you provided. That call may reveal a problem for which you were unaware. The problem may be real or perceived, but either way the call gives you a chance to be a customer service hero and puts you in a position to get paid faster.
    2. Your second call can become diplomatically more direct: “I’m a little surprised I haven’t received payment yet. When I last called you, you indicated everything was fine with my work (or you’ve fixed the problem). Can you send your payment today?
    3. By the time the third call comes, you know there’s a real problem collecting and you must squarely inform your customer that you’ll have to consider sending the delinquent debt to counsel for legal steps.

The important point from the above steps is to note there is no substitute for the effective telephone call or visit. However, certainly confirm all telephone calls with a letter or email (emails should require a “read” receipt). The frequency of these telephone calls and letters will become dictated by your written terms and conditions defined on your invoice.

Using the rule of thumb of past due 30-60-90 days is a good place to start, but can be shortened if necessary. By the time you hit 90 days past due for a customer, you must have a firm policy of placing the debt for collection.

  1. Seek out a good computer program to automate your receivables policy. There are hundreds of such programs available.
    1. Depending upon the extent of your receivables, you may want to invest in something as global and sophisticated as SAP’s Collection & Dispute Management software – you can check it out at: http://www.sap.com/solution/lob/finance/software/collections-dispute-management/index.html
    2. It can also be as simple as implementing the features of Quickbooks.

The level of how much you need to invest in software should be a function of your investment of credit facilities for your customers. However, certainly consult with your accounting professional to determine which program works best for him!

Regardless of the program you choose, the key is to be consistent in the treatment of your delinquent customers. If you let this or that customer slide a little longer, you’re in for trouble in the long run. I’ve had many people tell me, “…but I know John Doe really well – and all my customers.” Big surprise – they know you too and it won’t take some of them too long to figure out they can finance their situation on the back of your receivables approach.

  1. There are other methods to reduce your DSO such as factoring. Those methods are typically unique to given industries such as the apparel trades. Such schemes usually involve the creditor selling the receivables at a discount to a buyer (called the factor), granting them right and title to the debt. Again, these methods are usually driven by industry standard practices and should be well known to you if these alternative methods are available.

Here’s something else for you to consider, together with your accountant’s advice. The sooner you can write off a delinquent account to bad debts the lower will be your DSO figure and it will give you the advantage of a tax writeoff. Many client’s take that writeoff as soon as they place a debt for collection, while some wait for us to provide them with a letter to attest to the uncollectable nature of the debt. Either way, the sooner you can do that writeoff, your DSO line will improve.

Let’s wrap this up – paying attention to your business’s DSO figure will place you in a better position to obtain the needed capital financing for your business whenever it’s needed and will help you gain control of the cost to you for leaving receivables unattended.

Dave Greenberg began his career in commercial collections with Dun and Bradstreet in Seattle, Washington. After spending 8 years with D&B, Dave took a position with ABC-Amega Inc. Over a 32-year span, he vastly expanded their international department and became an industry leader in the commercial-international niche sector. He was a Past President of the California Commercial Collectors Association, on the panel of commercial arbitrators for the American Arbitration Association, and the Council of Better Business Bureaus, while also remaining active in the US Air Force Reserve.

He is a co-author for both FCIB and ICTF for their online credentialing courses for international credit management offered through Michigan State University and Thunderbird School of Global Management. Over the decades, Dave traveled the world, providing speaking engagements to credit grantors from Cyprus to Germany to China. He currently serves as Legal Liaison with the Law Offices of Gary A. Bemis.

Dave is also an author of children’s books and, along with his wife, recently moved to California to be closer to their grandson.

Share This: Facebooktwitterlinkedin