A 2019 study of DSO for businesses found that in North America, it typically takes 52 days for a business to receive payment on a credit sale. Average DSO varies by industry, but all businesses should have one common goal: To reduce their DSO so they get paid faster for their sales.
By monitoring their DSO, businesses can identify potential cash flow problems and take steps to address them before they become more serious issues. If you’re wondering why DSO is an important metric for businesses to track, how it can be calculated, and what steps businesses can take to improve their DSO and overall financial health, you’re in the right place. Read on to learn everything businesses need to know about DSO—and, more importantly, how to improve it.
What is Days Sales Outstanding (DSO)?
DSO means “days sales outstanding.” Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes for a company to collect payment from its customers after a sale has been made.
DSO is calculated by taking the average accounts receivable balance for a given period, and dividing it by the total credit sales for that same period, then multiplying the result by the number of days in the period being measured.
A higher DSO means that a business is selling its products or services on credit and taking a long time to actually collect payment on those sales. On the other hand, a low DSO shows that a business is receiving outstanding payments quickly, meaning it has a steady flow of cash coming in.
The average DSO for businesses in the food and beverage industry can vary depending on a number of factors, such as the size of the business, the types of products or services offered, and the specific market segment they operate in. However, according to a report by the Credit Research Foundation, the average DSO for food and beverage companies in the United States is approximately 39 days.
It’s important to note that this is an average and that individual businesses may have significantly higher or lower DSOs depending on their unique circumstances. Additionally, it’s important to compare a company’s DSO to industry DSO benchmarks and their own historical performance to get a better sense of how well they are managing their cash flow and collections.
How to calculate DSO
DSO is typically calculated on a monthly, quarterly, or annual basis. The formula for DSO calculation is:
DSO = (Accounts Receivable / Credit Sales) x Number of Days
You can use this DSO formula to calculate your DSO for any period of time by adjusting the number of days used in the formula.
For example, if a company had $100,000 in accounts receivable and $1,000,000 in credit sales for the past 30 days, the days sales outstanding formula would be:
DSO = ($100,000 / $1,000,000) x 30 = 3 days
This means that it takes an average of 3 days for the company to collect payment from its customers after a sale has been made. A lower DSO indicates that a company is collecting payment more quickly, while a higher DSO suggests that it is taking longer to collect payment.
DSO vs DPO
Days Payable Outstanding (DPO) is a financial metric that measures the average number of days it takes for a company to pay its suppliers after receiving goods or services. DPO is essentially the opposite of DSO.
While DSO and DPO are both important metrics for measuring a company’s cash flow, they represent different sides of the cash flow equation. A company’s DSO and DPO can be compared to gain insights into their cash conversion cycle, which is the amount of time it takes for a company to turn its inventory into cash.
If a company’s DSO is higher than its DPO, it means that it is taking longer to collect payment from its customers than it is taking to pay its suppliers. This can create cash flow issues, as the company may need to rely on short-term borrowing or other forms of financing to cover its expenses while it waits for payment from customers.
On the other hand, if a company’s DPO is higher than its DSO, it means that it is taking longer to pay its suppliers than it is taking to collect payment from its customers. While this can improve cash flow in the short term, it can also damage relationships with suppliers and potentially impact the quality of the goods or services received.
In general, a company’s goal should be to optimize its cash conversion cycle by managing both its DSO and DPO effectively. This means striking a balance between collecting payment from customers as quickly as possible while also managing its relationships with suppliers and maintaining adequate levels of inventory.
Why is it important for businesses to improve their DSO?
It is important for businesses to improve, or lower, their DSO because a high DSO can create cash flow problems and impact liquidity. In other words, when a business is unable to collect payment from its customers quickly, it may struggle to pay its own bills and expenses on time. This can lead to a shortage of cash, making it difficult for the business to operate and grow.
A high DSO can also impact a business’s ability to access financing, since lenders may view a high DSO as a sign of increased credit risk. This can further exacerbate cash flow problems and make it even more challenging for a business to maintain optimum levels of liquidity.
By improving their DSO, businesses can reduce the amount of time it takes to collect payment from their customers and improve their cash flow. This can help them avoid liquidity problems, reduce their reliance on short-term financing, and potentially access more favorable financing terms in the future.
In addition to these financial benefits, improving their DSO can also help businesses build stronger relationships with their customers — by demonstrating a commitment to timely payment and professional business practices, they can improve customer satisfaction and potentially lead to increased sales and revenue over time.
Days Sales Outstanding in the food services industry
Days sales outstanding benchmarks can vary significantly between industries. But in their Q3 2022 U.S. Accounts Receivable and Days Sales Outstanding Industry Report, Dun & Bradstreet and the Credit Research Foundation found that some food and beverage suppliers might be among the most common industries getting paid late.
Specifically, that report found wholesale packaged frozen goods to be in the top 10 industries with the highest percentages of severely delinquent accounts. For that industry, 12.6 percent of payments were up to 30 days late, 2 percent were 30-60 days late, 1 percent were 60-90 days late, and a shocking 15.1 percent were more than 90 days late.
A Bizfluent analysis of major foodservice brands also found a lot of variance across the industry, meaning it’s difficult to point to one food industry DSO standard that businesses can measure their own metrics against. However, considering how closely DSO is tied to cash flow, a too-high DSO can be a serious problem for foodservice businesses, for whom razor-thin margins are common. Improving days sales outstanding in food distribution, foodservice, beverage distribution, and similar industries should be a common goal—see the next section for some actionable tips for doing so.
Learn more about DSO and other payment basics with our free guide: Payments 101 for Food and Beverage Companies
How to reduce Days Sales Outstanding
Businesses should aim to manage their DSO effectively in order to maintain a healthy cash flow and maximize their financial performance over the long term—and reducing DSO is certainly a part of that puzzle.
The eight steps below are some that all businesses—across industries—can take to improve days sales outstanding, increasing cash flow and creating a more stable overall financial outlook in the process.
Step 1: Understand your current DSO
As the saying goes, you can’t manage what you can’t (or don’t) measure. That’s why the first step—before you start improving your business’s DSO—is to have a clear understanding of where you’re starting. This will help you establish a baseline for current performance, which can involve calculating your business’s current DSO and reviewing historical data to identify trends and patterns.
Collect as much data as possible, and calculate your DSO over multiple time periods (monthly, quarterly, and annually, if possible). This gives you a starting point for improvement, and can help inform your goals, which you’ll set in the next step.
Step 2: Set goals and (realistic) expectations
Once the baseline has been established, you should analyze your business’s DSO data to evaluate your current DSO—and look for root causes if it’s particularly high. Some ways to do this are reviewing payment terms, analyzing customer payment behavior, and identifying areas where your collections process could be improved.
Based on your analysis, you can set realistic goals for improving your DSO over time. This may mean setting specific targets for what you want your DSO to be, or your goals can be more big-picture—like improving the efficiency of your collections process, which will naturally result in a lower DSO.
Remember that you’ll want to monitor your progress toward your goals, which means the best goals are measurable. For example, if your goal is to collect faster payments from partners, you’ll want to be sure to monitor your credit versus cash sales, credit accounts receivable, and, most importantly, the amount of time it takes you to collect on each credit payment.
Step 3: Follow up on unpaid invoices
Celonis’s 2021 State of Business Execution Benchmark Report found that businesses pay their suppliers on time only about 50 percent of the time. In industries with more volatility and narrower margins (like the food and beverage industry), that number is likely to be even lower.
That’s why the next step in improving your DSO is following up on customer payments that are already past due. By reconciling as many of these accounts as possible, you give your business a clean slate to start with as it moves onto—and implements—the other strategies on this list.
The best way to deal with late payments is to be proactive about them—especially if you can utilize the data you collected in Step 1 to eliminate any inefficient processes and see where you can shore up your collections efforts.
Step 4: Streamline invoice management
For too many businesses, the invoicing process means manually inputting data, updating balance sheets, tracking due dates, and processing payments. Simply updating your AR processes from paper to digital can improve DSO—and that’s why food and beverage industry businesses need notch.
notch Accounts Receivable Manager helps you save hours every week by automating data entry and card processing. It also provides one central place where you can view and manage all your AR data, including order statuses, histories, payment requests, cash applications, and refunds. Plus, it syncs QuickBooks Online, Quickbooks Desktop, Fidelio, FDS, and other tools, making your workflow perfectly seamless.
But where notch can really help improve days sales outstanding in food distribution is by giving your customers more choices to pay, including credit cards, ACH/EFT, and terms. Your customers can even set up automated and batch payments. The result? Faster payments, lower DSO, and more cash flow for your business.
There are many other ways notch can help streamline operations for foodservice distributors (and their restaurant partners)—learn more by scheduling a demo today.
Step 5: Evaluate your partners’ creditworthiness
At the root of many a business’s high DSO is its customers’ ability to pay their invoices on time. If you’re struggling with too-high DSO, taking a hard look at customer credit (and your own credit policy) may be part of the solution.
You should create and standardize a credit approvals process that includes clear parameters for the risk you’re willing to take on when making credit sales. Know your customers’ credit scores and debt-to-income ratios, and review their cash-flow statements before issuing them credit. Set clear credit terms and limits, and monitor existing customer accounts regularly to ensure they meet your policy’s requirements.
New customers should also meet your credit requirements. If they don’t, mitigate the risk to your DSO by asking for payment upfront.
Step 6: Standardize your payment terms
If your AR process consists of different invoices with different due dates and varying payment terms, it’s time to standardize how and when your customers pay you. It is essential to establish clear payment terms, including due dates and payment methods, before conducting business with a customer. This will help to avoid confusion and ensure that customers know when payment is due.
For example, if one customer has X number of days to pay outstanding invoices, and another company has Y number of days, it can create confusion both internally and for your customers. This makes tracking and collecting on invoices more difficult, and can negatively impact your DSO.
This is another way notch can help foodservice businesses streamline their AR processes. Having all your accounts accessible in one dashboard makes it easier to manage invoices—meaning you can quickly see terms and know which accounts are current and which are past due. And digitizing your payment process makes it easier for your customers to pay their invoices—increasing the odds that they’ll pay on time.
Step 7: Create strategies for avoiding (and addressing) nonpayment
The next step in reducing your DSO involves looking at your collection process. If a customer does not pay on time, it is important to follow up with reminders or phone calls. With notch, you can automate follow-ups to make the process more efficient.
Shortening your collection period will improve your DSO. Offering early payment discounts or charging interest on late payments can be effective ways to encourage your customers to pay their invoices on time.
Step 8: Keep up the momentum
Finally, companies should regularly monitor their progress toward their DSO improvement goals and make adjustments as needed. This may involve analyzing data on an ongoing basis, making changes to collections processes, or revising goals if they are not being achieved.
The important thing is to not return to your old ways of DSO handling, but to keep up the momentum you’ve built to continue monitoring and improving DSO as part of your long-term business strategy.
Notch helps restaurants and foodservice distributors optimize their DSO
Improving days sales outstanding in breweries, food and beverage suppliers, and other foodservice businesses is within reach. You just need the right tools. Ready to see how notch can help?