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What is the best method of computing DSO?

The dynamics of business and the type of industries coming up pose a challenge in computing DSO( Days Dales Outstanding) at any point in time. We are used to the text book formulae to compute DSOs. There is a school of thought that in a service industry (ITES for example) you may have a DSO on your AR at the month end. In a particular day during a month the billing would not have happened irrespective of services being delivered since the billing mode is monthly, people try to compute DSOs. Here, they take the AR position as on the date of computation, arrive at the DSO using the formula and then add the number of days that has passed by, at the date on which the DSO is computed. Can someone throw some light on the best practice please?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If I understand what you described, your company only bills monthly. As such, the traditional DSO calculation [A/R/Credit sales x 365].

Why not soften the number by using a moving quarterly Credit Sale number, multiplied by 4 to annualized it.

If done every month, you'll get results that allow you to compare your moving DSO number.

Hope this helps.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

By the way, rule of thumb is all invoices over 80 days (assuming net 30) should be sent a final demand and at 90 days it should be given to an well known agency.

At 90 days the probability of getting paid is reduced by 30%.

Raghavan A
Title: Associate Vice President- Finance
Company: Sutherland Global Services
(Associate Vice President- Finance, Sutherland Global Services) |

Thanks. It is exactly done that way. Yes, the billing is monthly. Where we track DSO on a weekly basis, there will be movements in the A/R position, the average daily revenue remain as was computed for month end. when there is movement in A?R position, DSO will surely come down. The suggestions made by some of the Big$ firms is that when the DSO so computed in between months, the reduced DSO position should be grossed up with the number of days passed as at the date of computation. For example, if the DSO is computed on 15th of the month, the reduced DSO should be added with 15 days. Is this the right way?

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