Day of Sales Outstanding: DSO Calculation and Formula

DSO Calculation Formula

DSO stands for Day of Sales Outstanding, a calculation and formula used in sales forecasting. It is a metric that is used to determine how much of a company’s revenue comes from sales in the current day.

The formula for DSO is:

DSO = (Revenue – Expenses) / Days in Current Period

How to calculate day of sales outstanding

DSO is a metric that measures the number of days required to turn over an average dollar of sales. It’s used to measure the time it takes for a company to recoup its investment into its product.

A DSO calculation is simple:

DSO = Days Sales Outstanding / Average Revenue per Unit

DSO = 365/Revenue per Unit

DSO = 365*Revenue per Unit

DSO calculates the number of days a product has to sell in order to reach its DSO.

The formula for calculating DSO is as follows:

DSO = (Sale Days) / (Days in Year)

DSO is calculated by dividing the number of days a product has to sell in order to reach its DSO by the total number of days in a year.

What You Need To Know About Days of Sales Outstanding

Have you just set up your first company? If so, there are many things you need to know. 

For instance, how long does it take your company to get paid by another company?

Days of sales outstanding or DSO is a bit of a confusing term. It has more to do with invoicing than sales. 

Here at JTT Accounting, we believe in making sure our clients know how to look after all of the aspects of their business. We are more than happy to help you to reduce your DSO. 

Understanding Billing Terms and How They Affect Days Of Sales Outstanding

When you invoice a client, your create a credit in your accounts. However, is that invoice really a credit?

In technical terms, the invoice you sent your customer is a credit. But, that invoice does not really benefit your business until it is paid. In fact, the amount indicated on the invoice is owed to you. 

When invoices are outstanding for a long period of time (not paid), it can affect your company’s cash flow. 

As a business owner, it is important to understand billing terms. For instance, what does net 30 days mean? Technically, it means you should get paid the entire value of the invoice 30 days after the date stated on the invoice. 

Does that always happen? No, many customers think they can push the payment period. 

How Do You Avoid Extended DSO? 

If you are new to business, it is important to understand there are ways you can protect your business. 

A new customer that you like may place a huge order with your company. That is great. But, just because you like him, does it mean his company is going to pay you on time? 

The answer to that question is no. You may have invoiced the company but not received the payment. 

You need to ask yourself what you really know about his company. Is the company credit worthy? 

Being credit worthy means they can afford to pay the invoice. 

The best way to check if a company is credit worthy is to do a credit check. You can turn to a company such as Dun and Bradstreet or ask to see the company’s accounts. 

When you know a bit more about your new trading partner, you can set credit terms. 

Making sure the right credit terms are set is a great way of improving your days of sale outstanding. 

Different Credit Terms

If you don’t like what you see, it is a good idea to ask for other terms. Don’t be afraid to tell the person. This is pretty normal in business. 

When you notice the accounts for the company are not that great, you should ask for a pro-forma payment. 

What is a pro-forma payment? A pro-forma payment is where you ask for part of the order or the entire order to be paid upfront. 

If your company manufacturers unique goods that can’t be used for another order, asking for a pro-forma payment is fairly normal. You don’t need to ask for the entire order to be paid upfront. 

However, it is a good idea to ask for the cost of manufacturing the order to be paid with order. That way, you don’t end up out of pocket should your trading partner not pay. 

Can a Company Ask For Longer Payment Terms Than Net 30 Days? 

They can indeed. However, if a company does that, alarm bells should be ringing in your head. Why can’t they afford to pay for the order? 

It is important to appreciate that credit is best described as double jeopardy. 

You pay for the goods and manufacturing process. As an incentive, you may even offer to pay for shipping. 

You invoice your customer and he does not pay. It means you have paid for the goods, manufacturing, shipping and been left without a profit as the invoice has not been paid. 

Think very carefully before you extend credit terms to a business. 

If you are not sure how to check if a company or a self-employed person is credit worthy, ask JTT Accounting Services to help. 

Getting Your Customer To Pay

If you ship regular orders to a company, you probably bill them on a regular basis as well. 

Let’s take a look at a case scenario. If you have billed company X twice a week for the last month, you have eight invoices outstanding. They may not all have the same due dates. 

But, to make sure the customer is aware that the invoices are outstanding, it is a good idea to send them a statement. 

Your customer statement should include the billing date, invoice number, amount owed and due date. 

When you send a statement, your customer should check that the company has received all of the invoices. In a perfect world, they should also check the invoices have been entered correctly and have the right due dates. 

This is a great way of monitoring the Days of Sales outstanding in your organisation. 

You can either send the statement by post or electronically. Make sure you keep a copy in case you need to contact them. 

Do You Need help With Credit Control? 

JTT Accounting can help you with credit control.

What is credit control? That is when you or someone else make sure all outstanding (unpaid) invoices are paid on time. 

A good credit controller is worth their weight in gold. On many occasions, you will find credit controllers are excellent problem solvers. They seem to have this ability to anticipate problems. 

An experienced credit controller knows that prevention is better than cure. They often phone up or email to check that all of the invoices have been received. A top class credit controller may even check they right payment date has been entered on the system. 

They make a note and check if payment is received according to terms. These days most companies pay their bills by electronic transfer. 

What Happens When You Are Not Paid On Time? 

If you are not using JTT services, you need to start “chasing” the outstanding invoice or invoices. 

The best way to do that is to pick up the phone and give your customer a call. Find out why they have not paid. 

On occasion, there may be problems with an order. There could be a shortage in the delivery and the customer is waiting for the balance of the order. When you invoice, it is important to make sure the number of goods match those on the invoice. 

If a customer claims they have not received the goods, make sure you have a signed delivery note proving the goods were received. 

Another reason for non-payment is damages. On your delivery note, include a section asking the customer to confirm a short fall or damages within a specified period of time.

That is another way of making sure your days of sales outstanding are reduced. Your customer has no excuses not to pay the invoice on time. 

The best way to track payments coming in is to have a daily cash sheet. Your cash sheet should show all of the money that came in to your bank on one particular day. Ideally, it should also show invoice number so that you can check it off in your ledger accounts. 

Always go for open item book-keeping. That shows you clearly what invoices have not been paid. 

Is Credit Control Expensive? 

Employing your own credit controller is expensive. Credit controllers are well trained and may even have credit management skills. 

Credit management skills involve reading accounts and carrying out credit checks. In many ways, you can say that a credit controller carries out a risk assessment before you start dealing with a new customer. 

Having an in-house credit controller is expensive, but JTT can help you with all of your credit control needs. 

Why Does DSO Matter? 

DSO matters for several reasons. 

It is an essential part of cash flow. There is no point in billing a company unless they can afford to pay. 

Longer DSO can have a severe impact on many things in your company. It can even impact pay roll. 

DSO also has an influence on the way your business is seen by others. If you want to borrow money to grow your business or move to new premises, you may want borrow money from your bank. 

If you have a good DSO, your bank is more likely to lend you the money. When invoice payments are often late, a bank will think twice about lending you the money. 

Alternatively, a bank can also offer you less favourable interest rate when payment for goods delivered take a long time to enter your accounts. 

DSO is one of those things that an auditor will check. 

When you want to sell your business, DSO is also an important factor. Having a favourable DSO makes buying your company a better business proposition. 

How To Pay Taxes In Canada

Do I have to pay taxes every year in Canada? 

When you run a business or are self-employed in Canada, you have to pay taxes on your annual profits. 

It goes without saying that if you work for someone, you also have to pay tax. 

In Canada, you file your corporation tax at the end of the organisation’s fiscal year. You should file them within a period of six months after the end of the fiscal period for your company. 

If you don’t file them on time, you may have to pay penalties. 

Do fiscal periods vary? Once you have set a fiscal period for your company, you need to stick to it. If you want to change it for any reason, the best thing you can do is to contact JTT Accounting Services in Ontario and Ottawa. 

Not all companies have the same fiscal period. 

How Do I Make Sure I Can Afford to Pay Tax? 

At the end of the fiscal period, you need to pay your tax. 

The best way is always to pay the tax in one lump sum. 

Many companies find it hard to make sure they have enough money to pay tax. The team at JTT can help you to set up an easy-to-follow system that ensures you have enough money for tax. 

To make sure you stay on top of your tax commitments, it is a good idea to set aside an amount every month. It should be the amount of tax calculated on the profit you made that month. 

You may overestimate on occasion, but it always better to have more money than not enough. If you have a surplus of money in your tax account once the taxes have been paid, you can always use it for something else. 

It is a great way of making sure you always have money for tax and a little bit extra. 

Can I Reduce My Tax Liability? 

There are ways in which a company or a self-employed person can reduce their taxes. 

If you have made a lot of profit one year, you should discuss your options with your accountant at JTT. 

You could take part of the extra profit and invest it in something. Of course, you could take it out, but then you will have to pay tax on it. 

There are ways in which you can legally reduce your tax burden. One thing you must not do, is try to reduce your tax burden in a way which is not compliant with Canadian tax laws. 

Final Thoughts

JTT Accounting Services can help you with your everyday accounting needs including book-keeping and payroll. 

At JTT, we can also help you with monitoring your DSO and performing annual audits. When you feel that you are paying too much tax, you should talk to us about it. 

We have helped many of our clients to reduce their tax payments and manage their DSO.

Give JTT a call when you would like to find out more. You can also send us an email or fill in the contact form on this very website.