DSO Case Study by Debt Nirvana, A Debt Collection Agency

The average no. of days a firm takes to collect the payment after the sales from the creditors is called DSO-Days of Sales Outstanding. The DSO can be calculated by :?

??????????????DSO = (Accounts Receivables x? No. of Days) /Net Credit Sales

Accounts receivable are the company's payments for sales made on credit. The longer the company takes to collect the payment, the higher the DSO will be.

Lower DSO means the firm takes a few days to collect receivables. Lower DSO is usually good for a firm. It helps a firm to run the working capital & operational cycle of the company smoothly. Higher DSO will lead to a cash flow problem in the company.

Lower DSO is essential for small enterprises. They require timely financial inflows for operations, personnel salaries, and other expenses. They cannot clear future payments unless they collect receivables on time.

Various factors affect the outstanding days of sales. Let’s have a look at it.

Factors affecting the DSO

1. Credit Policy of a firm?

A firm sells its goods on credit for some days, due to which policy for credit can affect the DSO of a firm. <45 to 30 days of DSO is considered a good DSO for any firm. So, if a firm’s credit policy is not according to it, it can affect further operations.?

2. Payment Terms by Sales Team:

Sometimes, the sales team of a firm can change the payment time of the sales to increase the sales. That will lead to a delay in payment collection. When the payment is not collected on time, there will be a delay in the operations management.?

3. Economic Condition:

In economic conditions like recession, it will be difficult for the creditors to clear the payments. As there is already a recession in the market, customers can delay their payments because of the cash flow shortage.

4. Customer Payment Habits:

Many times, customers are habitual in clearing their bills after the deadline. This habit can impact the cash flow cycle of a firm. When the receivable bills are not cleared there will be difficulty in clearing the payable bills.?

5. Weak collection process:

The constant reminders, polite requests, and invoice formation are essential for the smooth collection of payments. Sometimes, the company lacks in the collection process. This may lead to a disturbance in operating functions.

Till now you might have some idea about how DSO can affect a firm.? Let’s see in detail the effects of higher DSO on the Business.

How does higher DSO affect your business?

Every firm follows the process of procurement to sales. In between, the whole production process is carried out. The initial investment results in cash generation for a firm. From that cash inflow, the procurement for further operations is done. When inflow is stuck, it will impact the whole procedure from procurement to sale.

Let’s get into it in detail.

1. Cash Conversion Cycle:

The cash conversion cycle is about the cash outflow process to cash inflow. The amount payable for the purchase of raw materials is a cash outflow for a firm. The amount receivable from the sales of finished goods is cash inflow for a firm. The receivable amount is further used for the procurement process. The cash conversion cycle is impacted if the cash inflow is disturbed.?

2. Working Capital

Working capital is the amount that is used to fulfill the day-to-day operations. When there is a delay in the amount of receivables, the direct impact will be on the working capital of the firm. The company will struggle to fulfill the day-to-day operational requirements.

3. Profitability

When the amount receivable is not received on time, a firm might be late in clearing the outstanding bills of the payable. The creditors may charge interest due to the firm's late payments. This will impact the profitability of the firm.

4. Risk of Bad Debts

Bad debt is a payment that is supposed to be non-recoverable from the debtor's end. Bad debt is the reason for the weak debt collection process. That’s how Bad debt can be generated by Days of Sales Outstanding.

5. Operational Inefficiency

Operations include the process of converting raw materials into finished goods. There are various expenses in the operation process, such as rent, wages, electricity bills, etc., which are intended to be paid from the cash receivables. If the cash is not received on time, the operational inefficiency will increase.

6. Customer relations

Sometimes, to decrease the DSO, we must constantly contact the debtor to remind them of the due payments. A situation may arise where the firm needs to take legal action to collect the receivable, which could spoil the relationship between a firm and the customer.

However, Days of Sales Outstanding can be decreased with a specific solution. Let’s dig into it.

Solutions for the DSO effects on a firm:

The various constant practices can result in a decrease in DSO, such as:

1. Credit Policy Management

Credit policy is policies made by a firm to run the smooth cash flow in the business. This includes the term of sale, credit extension, and collection policy. As long as a firm sticks to these policies, they can maintain the DSO for the sales.

2. Error-free Invoice

A firm should send the invoice to the debtor when the goods are sold. The delay in sending the invoice can stretch the Days of Sales Outstanding. Along with sending the invoice on time, it is also necessary to check the details, such as the date of the goods sold, credit period, etc. The information in the invoice should be accurate to avoid future misunderstandings.?

3. Collection Process

A firm should have an appropriate collection process for the timely collection of the bills receivables. Constant reminders and clear communication with debtors play crucial roles.?

4. Penalties

A firm can implement penalties for late payments from the debtors. This practice can influence the debtor to clear the bills on time. Sometimes, the bills receivables also become bad debts, and at that time, a firm can also take legal action to recover the debts.

5. Collection Agency Outsourcing

One of the most convenient solutions is outsourcing the collection agency. You can transfer the stress of collecting the receivables to the collection agency. They will contact the debtors, send reminders, etc. on behalf of you. They can anyhow collect all your debts successfully.

If you are looking for a collection agency to outsource for the smooth collection of the receivables, you can contact Debt Nirvana.

Debt Nirvana as Debt Collection Agency

Debt Nirvana, a Debt Collection Agency has collected the DSO data across the world. Let’s have a look at this line graph.

These are the data collected by Debt Nirvana.?

If we talk about the North American region, the debt nirvana helped firms reduce 90 DSO in 2020 to 18 DSO in 2024. However, in Europe, the Middle East Region experienced a decrease from 130 in 2022 to 60 in 2024. In the same way, in the Asia Pacific Region, DSO decreased to 90 from 150.

This chart describes the overall success of Debt Nirvana in helping firms to reduce their Days of Sales Outstanding. Firms can save millions of dollars annually with the reduction in Days of Sales Outstanding. For more information, contact Debt Nirvana at +91-9810010294 or email at [email protected] .