Say one year later the ADD is 15 days, which may mean your processes may be falling behind. ADD is calculated as the DSO minus your actual (average) terms.įor example, with the hypothetical company above in #1, the ADD would be ten days on September 30. If the number is high, you must determine whether your systems, collections, and invoice processes need improvement. Average Days Delinquent (ADD)ĪDD is how many days on average payments are overdue and can be a warning sign of problems. It’s unlikely you’ll achieve perfection, so make strides to reduce the metric over a 3-6 month period. Once you start calculating the DSO and Best DSO, create monthly targets that “move towards” the Best DSO. Working towards a DSO that is as close as possible to your Best Possible DSO should be the goal of your department to have a healthy cash flow and ensure your AR management is as efficient as possible. In this case, you have a lot of potential for improvement between the Standard DSO of 57 Days and the Best Possible DSO of 28. Using the above numbers, if your Current A/R is $800,000, your Best Possible DSO comes out to 28. However, for a simple example, suppose that your AR totals $1,600,000, and Credit Sales for the last twelve months were $10,200,000, the formula would beĭSO = Total A/R ÷ Total Credit Sales X 365, and the answer a DSO of 57.2 days.īest Possible DSO uses only your current (not yet past due) receivables and tells you what your best “on-time payment” turnaround could be.īest Possible DSO = Current A/R ÷ Total Credit Sales x 365. Depending on the industry and seasonality, DSO calculations can get complicated. That is, how long it takes to collect payments based on the invoice date, intending to reduce your DSO to as close as possible to your average terms of sale (the “Best Possible DSO” or “Best DSO”). Standard DSO is the metric for tracking the effectiveness of Invoice Collection Management. Days Sales Outstanding (DSO) and Best Possible DSO (BPDSO) In addition, businesses have become more complex, so receivable performance analytics are essential to keep track of the financial health of your receivables. Understanding DSO, DDO, and Other Accounts Receivable KPIsĪ/R turnover – the credit-to-cash cycle – and working capital are critical to your business, so it is essential to monitor the Key Performance Indicators (KPIs) and other metrics that track your company’s credit, collections, and deduction management health.
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