DSO Vs Turnover

The Days Sales Outstanding (DSO) and sales turnover are interrelated financial metrics that together provide insights into a company's efficiency in managing its accounts receivable and generating sales

So let’s first understand Days Sales Outstanding (DSO)

DSO measures the average number of days it takes a company to collect payment after a sale has been made. It is a key indicator of the efficiency of a company’s accounts receivable process. The formula for calculating DSO is:

Now let’s move to Sales Turnover which, by the way is the primary lever in this relationship!

Sales turnover, often referred to as revenue or total sales, indicates the total amount of sales generated by a company over a specific period. It reflects the company’s ability to sell its products or services.

Now let’s get to the different correlations that can be arrived at between DSO and Sales Turnover

1. A lower DSO indicates that the company is collecting its receivables quickly, leading to better cash flow. With better cash flow, the company can reinvest in its operations, potentially boosting sales turnover.
2. A higher DSO indicates slower collection of receivables, which can strain cash flow. Poor cash flow might limit the company’s ability to fund sales and marketing activities, potentially reducing sales turnover.
3. If a company experiences rapid sales growth, it might see an increase in accounts receivable, which can temporarily increase the DSO if collections do not keep pace with sales.

STRATEGIC IMPLICATIONS

1. Balancing Credit Terms and Sales:
   Liberal Credit Terms: Offering more liberal credit terms can boost sales turnover by attracting more customers, but it can also increase DSO if customers take longer to pay.
   
   Stricter Credit Terms: Stricter credit terms might reduce sales turnover slightly but can help keep DSO lower by ensuring quicker payments.
2. Monitoring and Adjusting Strategies:
   Companies need to continuously monitor both DSO and sales turnover to ensure they strike a balance between generating sales and managing receivables efficiently.
   
   Adjusting credit policies, improving collections processes, and leveraging AR automation tools can help maintain an optimal balance.

Example Scenario
Consider a company that improves its receivables management process, reducing its DSO from 60 days to 30 days. With faster collections, the company experiences better cash flow, enabling it to invest more in marketing and sales efforts. As a result, sales turnover increases by 15%.