Before recommending the tactics to improve your company’s Accounts Receivable (AR) and cash flow, it’s beneficial for you to first understand how to measure the performance of your AR. DSO, or days sales outstanding, is an accounting ratio that reports the length of time it takes to convert a sale into cash. Companies monitor DSO because it strongly affects cash flow. For example, a higher DSO generally indicates a business is struggling with cash flow. The lower the DSO is, the quicker a company converts its sales into cash. DSO is calculated on a monthly, quarterly, or annual basis.
On the other hand, DSO isn’t the only way to measure your Accounts Receivable department’s effectiveness, as DSO is often impacted by factors beyond your accounting team. Specifically, fluctuations in sales volume impact DSO—which accounting usually cannot control. Therefore, delinquent days sales outstanding (DDSO) and days beyond term (DBT) are more accurate metrics for determining your AR efficiency.
DDSO calculates the average difference between the invoice due date and the date paid. DBT is the average number of days that delinquent invoices have been overdue. DDSO and DBT both contain delinquent accounts in their equation, and are therefore better indicators of your AR department’s performance.