How to Calculate Days Sales Outstanding
You work long hard hours on the road, day after day to deliver freight safely and on time. All the while you’re managing the anxiety of waiting for invoices to be paid and hoping your cash flow is strong enough to cover expenses.
Rather than suffering through this anxiety, it’s best to be proactive and follow specific strategies designed to manage your cash flow.
Calculating the average payment days of your customer base to predict when invoices will be paid provides a dependable estimation of when revenues will be collected. This allows for effective financial planning.
A second, more powerful strategy is to utilize freight factoring to expedite the payment of invoices and create immediate positive cash flow.
What is DSO?
Days Sales Outstanding (DSO), also known as Accounts Receivable Turnover, is a measure to predict when invoices will be paid. It is a calculation to determine the average number of days it takes for your trucking company to collect on accounts receivable invoices over a specific period of time.
In short, it is tracking how fast your customers pay you. DSO is used to analyze your company’s collection efforts, A/R trends and customer payment behavior. This important metric is vital in determining the financial health of both your customer base and of your trucking company.
Why calculate DSO on a regular basis?
The ageing of accounts receivables is a common challenge to most trucking companies. If your company’s DSO greatly exceeds the payment terms you extend to your customers, then immediate measures must be taken to collect that cash. Playing “bank” to your customer can negatively affect your bottom line.
A healthy cash flow is of vital importance. It is highly recommended for your trucking company to assess its DSO on an ongoing basis. This exercise will prevent you from unnecessary credit risks.
How to Calculate DSO
Calculating DSO is a simple equation. Divide the Outstanding Balance of A/R by the Total Sales generated during a period of time, and then multiplying the result by the Number of Days in the same period.
Total A/R Outstanding
For example: If your trucking company has $300,000.00 in outstanding A/R and has generated $600,000.00 in sales over a 90 day period, then the DSO = 45 Days.
$300,000.00 ÷ $600,000.00 x 90 = 45
The speed with which your company converts its invoice receivables into cash can have a tremendous impact on the overall health of your trucking business. As a general rule of thumb, your company’s DSO should not exceed the credit terms you extend to your customers by more than a third to a half. So if your terms are 30 days, an acceptable DSO would be between 40 and 45 days. In the case of the above example, this trucking company has an acceptable DSO.
Variables that affect your DSO
In an ideal world, your DSO should remain at a consistently low level. This would indicate that your company is collecting its receivables efficiently and in a timely manner. However, it is important to understand the following variables:
- Seasonal Fluctuations: trucking companies experience seasonal volume variations. January and February can often prove to be periods of low volume, whereas, spring and fall are generally high volume times. The sales peaks and valleys that accompany these seasonal shifts usually result in skewed DSO numbers that do not necessarily reflect accurately your company’s financial status.
- Growth Periods: if your trucking company increases its fleet size to service a new contract, then naturally sales will suddenly increase over a short period of time. This will certainly create a skewed DSO result as initially the increased sales will be disproportionately larger than your outstanding receivables. It may take several months for this ratio to correct itself and an accurate metric can be taken.
Track your DSO at regular intervals
Tracking your DSO at regular intervals provides two important results. First, it provides a measure to help predict cash flow which allows you to determine your company’s financial readiness for upcoming expenses. Second, it clearly indicates potential credit risks as they develop. A consistently low DSO number shows your company performing well in collections. A consistently high or worsening DSO number is a definite warning sign that cash flow is stagnating and the risk of payment default by your customers is increasing. From a management perspective, it is easiest to monitor this activity on a trend line.
Whatever measurement methodology is utilized, ensure it is consistent from period to period so that results will be comparable. In this manner, watching for a sudden spike in the trend line will effectively pronounce the probability of upcoming cash flow problems.
Freight factoring creates instant positive cash flow
Due to the extreme importance of maintaining healthy cash flow to sustain your trucking business, it is in your best interest to collect outstanding receivables as quickly as possible. Freight factoring (a specific form of invoice factoring for trucking companies) is a mainstream financial strategy to convert invoices into cash within 24 hours. It is a cost- efficient means of gaining immediate access to working capital. By converting invoices into immediate cash, your trucking company has the ability to pay the daily operating expenses needed to keep your fleet hauling loads and generating further revenue.
Further benefits of freight factoring
No matter how big or small your trucking company is, trucking is a complex business in a capital intense industry. Larger companies employ a comptroller to manage these complexities, while smaller companies have to take a different approach. Partnering with a reputable freight factoring company, such as eCapital, provides tools and services to better manage accounts receivable, credit risk, financial reporting and much more. These additional benefits include:
- Accurate & efficient Accounts Receivable Management to reduce DSO
- Same-day funding
- Free credit checks to ensure you work with creditworthy shippers and brokers
- Secure, online access to view your account 24/7
- Regular and easy to understand reporting to monitor your account
- Fuel discount programs
To further benefit your business, eCapital provides pre-negotiated discounts with industry suppliers and time saving tools, all the things to help you run profitably.
Knowing the DSO (Days Sales Outstanding) is important to understanding the state of your trucking company’s financial status. Having a financial management tool such as invoice factoring ensures reliable and immediate access to working capital. Utilizing one or both of these strategies will greatly reduce your anxiety level regarding cash flow management.