Cash Management and Days Sales Outstanding

by | Jul 7, 2006 | PKF Texas - The Entrepreneur's Playbook®

Note: Running most Fridays in, this is the second in a series of business tips offered by Greg Price. These run Saturday mornings during the BusinessMaker’s Radio Show on FM Newschannel 97.5. Audio files can be found at the PKF Texas Radio/Television page.

In this ever more fragile economy, managing your cash flow may prove to be one of the keys to your Company’s survival. Customers will delay payment in an effort to preserve what little free cash they have. Unfortunately, this can be prove to be extremely painful for your Company, and may lead to your demise.

As an owner/entrepreneur, you are faced with many financial terms. One of the key terms you should become familiar with in managing your business is “Days Sales Outstanding (DSO).” You can calculate DSO by dividing your total annual revenues by 365 to get your average daily sales. Then, take your monthly accounts receivable balance and divide by the average daily sales to get your DSO.

Did you know that a properly designed and implemented cash management process, allowing you to track and collect overdue accountings can have an immediate impact on your cash flow? For example, a three-day reduction in your DSO balances (a very reasonable and achievable target) will generate $5,000 in cash flow for every $1 million in revenue. Thus, a $10 million dollar company should be able to generate $50,000 in cash flow by having a well designed and operating cash management and collection program.

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