We started talking about KPI’s in a previous post. One Key Performance Indicator that is crucial for any business that issues invoices is Days Sold Outstanding (DSO). This is a crucial report in bookkeeping for businesses with accounts receivable.
Days Sold Outstanding shows you how quickly your business collects payments. A poor DSO indicates cash flow issues or business process problems. It is also a risk for banks and lenders because they are less sure you can get the money to cover the payments on any loan they may lend to you. Also, a poor DSO number may be a sign you aren’t collecting as often as you should, and you may be targeting some poor customers for your business.
Let’s go into how to calculate it:
(Accounts receivable / total credit sales) x number of days = Standard DSO
Example: Event Management
Let’s say we have a event management company. They have 8,000 in accounts receivable for January 1. Next month, February 1, they have 13,000 in accounts receivable. During that time, they also made $8,000 in credit sales.
Step 1 is to find the average accounts receivable
(January AR + February AR) / 2 (data points) = Average accounts receivable
(8,000 + (13,000) / 2 = 10,500 average accounts receivable
Step 2: find the total credit sales:
$8,000 to see our example.
January has 31 days, which will be our number of days for the DSO formula.
(Average accounts receivable / credit sales) x 31 = days sales outstanding
(10,500 / 8000) x 31 = 40.6 = 41 days DSO.
To find out if this is good for an event management company, you can ask chatgpt, consult an industry expert, or look up a trade publication that talks about that KPI. Accounts receivable tracking is too important to ignore.
If you don’t have few accounts receivables, like this humble bookkeeper, don’t worry too much about it. If I was your bookkeeper, I could keep an eye on things like DSO if it is relevant to your business. This gives you better decision-making information and also saves you time. Business owners routinely save 80+ hours a year handing bookkeeping off to a bookkeeper compared to doing it themselves. So let’s get started. Schedule a call with me today to talk about your business goals.