Frequently Asked Question from Winter FinListics Newsletter

What are A/R and DSO?

by Guillermo Bustamante, Director of Research at FinListics Solutions

A. Accounts Receivable are balance sheet items and money owed to a client by its customers for products and services purchased but not paid for yet. DSO measures the average number of days (like 30 days) it takes to collect accounts receivable.  For many clients, accounts receivable is a critical component of managing financial performance. It impacts both the balance sheet and income statement in terms of operating expenses related to managing A/R. Consider this: for every $100 million in revenue, just a one-day reduction in DSO results in approximately $275 thousand in funds freed up on the balance sheet to invest elsewhere.

For a typical Retailer, DSO is less than 5 days since customers tend to pay with cash or third-party credit cards. DSO for Consumer Products is much higher (approximately 30 days) because most sales are to other businesses demanding credit terms.

Companies can better manage DSO by improving processes like credit risk assessment, billing, collections and dispute management. Important Key Performance Indicators (KPIs) that determine the length of DSO and related operating expenses are:

• Days to prepare and send invoices
• Credit terms, which will be affected by discount days
• Disputed invoices (measured by the average number of days to resolve disputed invoices)
• Overdue invoices
• Days for collection of invoice and conversion into cash

Now, think about how your solutions help improve the management of those underlying KPIs. By how many days do your solutions lower DSO – and what are the cash flow benefits?

If your analyses (this can be found in the FinListics Value Manager Summary Report) and other research indicate a client has a potential opportunity to improve DSO, you might ask questions like:

• Are you exploring initiatives like improving the quality and timeliness of information to better manage credit approval and credit collections?
• Are you looking at new ways to better manage the risk of your receivables portfolio?
• Are billing errors and the resulting disputes and higher receivables balances an issue?