What is Days Sales Outstanding, and how can service-based firms ensure accuracy in this process?
Service-based firms provide services or goods to customers in exchange for their money, as a result, how quickly they receive payments after billing can demonstrate the health of their cash flow – this financial metric is called Days Sales Outstanding (DSO)
More importantly, professional services firms need accurate financial reporting and analysis processes to ensure they know where their money is, and to keep track of outstanding sales that need to be recouped.
Executives rely on their financial departments to track money, ensure outstanding payments are settled, and maintain a healthy cash flow. Finance teams rely on the DSO metric to report financial health in a vital KPI to executives and need succinct and accurate methods of generating an accurate DSO.
In this blog, we will cover what the Days Sales Outstanding metric is, why it's vital you monitor it, and how you can monitor this KPI accurately to keep track of financial health and to report this effectively – keep reading to learn more.
What is Days Sales Outstanding?
The finance metric Days Sales Outstanding (DSO) measures how long it takes for your business to collect payment from a client after a service is provided, giving valuable insight into the firm’s financial health and client satisfaction.
Days Sales Outstanding is a vital measurement of a healthy cash flow, executives want to ensure that they have the money they are owed, and accurate methods to track payments, so when a firm chooses to spend, they don’t have to chase down payments to do so.
Moreover, Days Sales Outstanding can help measure client satisfaction to some degree. When DSO drops it could be an indicator that the quality of service provided has dropped - if a client is satisfied, they will usually pay their dues.
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What is the Days Sales Outstanding (DSO) formula?
DSO is one of the most critical KPIs for financial executives because it measures how long it takes to collect payments from clients. The number is calculated by dividing the number of receivables by the total sales multiplied by the number of days in a period.
DSO = (average accounts receivables in time period/credit sales made in time period) × number of days in time period.
While this may seem like a simple formula for financial professionals, it becomes more and more complex as a firm grows.
If you have five clients, it’s quite easy to track payments with DSO. However, if you have multiple individual business units, potentially in different countries, and thousands of payments being made, it’s much easier for errors to occur and for payments to be missed.
Why is Days Sales Outstanding important?
A high DSO indicates that a company is taking longer to collect its receivables, therefore holding debts on its books, which negatively affects cash flow.
Finance teams must make sure they have accurate time and expense reporting processes and that their reporting of this metric to executives is also accurate and timely.
A low DSO indicates that invoices are produced quickly, expenses are tracked accurately, and payments are collected on time, resulting in the healthy cash flow and profitability service-based organizations rely on.
According to SPI, the percentage of invoices redone due to error grew by over 10%, and DSO went up to 46.8 days from 43.5, in recent years.
This shows that professional services firms need accurate and user-friendly methods to measure DSO, and to bill clients, to ensure that accounting errors remain low. These errors are likely caused by fatigue due to manual data entry, or financial teams being overworked due to talent shortages.
How can service-based firms ensure accuracy when reporting DSO?
As should be clear, DSO is a vital KPI for service-based organizations to assess their financial health, and executives are particularly interested in the reporting of this metric.
As a result, firms need clear processes and tools to make sure days sales outstanding can be measured and reported with accuracy and confidence.
1.Automate the process
While the Days Sales Outstanding formula isn’t notably difficult, even the simplest calculations can exhibit errors when finance teams aren’t sufficiently trained, engaged, or empowered.
With a global talent shortage of qualified accountants, finance teams may lack the number of staff needed to ensure that workloads are manageable. When short on staff, the office of the CFO must look to digital tools that can utilize AI automation for accuracy.
Even the best financial teams can fatigue, especially in large enterprises with complex workloads, whereas AI automation won’t. A service-based organization can reduce the amount of billing errors with the level of accuracy that AI automation can provide.
Moreover, the right AI tools can also provide advanced reporting capabilities, meaning that DSO calculations can be accurate but also can easily be turned into accurate reports as well, with added data visuals, and forecasts, so that executives can remain highly informed with easy-to-read reports.
2.Integrate with external applications
When tracking pending payments an organization will have to interact with its banking statements in some way, most of this is done digitally. As a result, those firms who embrace the Cloud will find it much easier and timely when measuring DSO if they can easily integrate and communicate with a third-party banking app, your CRM, and more.
The Cloud’s automation capabilities can make DSO calculations even easier when it can maintain an accurate data flow from your banking application. This can help resolve complex issues such as currency changes for different business units and ensure that your DSO is updated in near real-time.
This capability also means much of the interactions between a banking application and your ERP or accounting software can be automated. This reduces the manual burden of maintaining a data flow, on top of having to manually calculate DSO, helping boost productivity hugely.
3.Ensure staff are trained
Implementation of any process is vital, even those relying on manual DSO calculation should make sure that financial employees are sufficiently trained in how to generate an accurate DSO, and where the process can be optimized.
Yet, digital solutions to DSO calculation also require close implementation with the office of the CFO to achieve sufficient adoption. Implementing a new digital solution can lead to errors if not done correctly.
By defining the process for Days Sales Outstanding calculation, monitoring, and reporting, and sufficient training in this process, an organization can ensure that all staff are sufficiently trained, reducing the number of errors caused by lack of proficiency with the tools provided.
How Unit4 can help you
Utilizing an automated solution within Unit4 ERPx can help ensure accuracy by automating routine tasks. This type of software captures real-time data from all channels, so service-based firms can have an accurate view at every stage of their project.
Unit4 ERP Financial Management provides modules such as time and expense reporting, accounting, budgeting, cash management, accounts receivable, accounts payable, general ledger, as well as financial analytics. With these features, finance executives have greater control over their financial operations with integrated data.
By centralizing resource management, project management, financials, and client relationship management, ERPx provides a cohesive platform that eliminates data silos and improves efficiency.
With sophisticated analytics and automation capabilities, finance teams can gain better insights into their customer’s payment trends to maximize profitability while reducing errors in this process.
Speak with sales today to see how our product can help you with DSO accuracy.
