Small and mid-sized companies do not always keep track of late payments. Yet these are key indicators, as delayed payments can have a catastrophic impact on your cash position and, consequently, on your ability to continue operating Hence the importance of setting up a dashboard that will provide an overview of actual payments along with trade accounts receivable and payable.
To help track payments, turn to a key but poorly-known indicator: the Days Sales Outstanding (DSO).
It measures the average time of payment for your commercial invoices and can help you assess your ability to receive payments in a given period of time (for example, one month). This information will allow you to act before it is too late, by issuing reminders, with suppliers or anticipating financing requirements.
DSO calculation: DSO = (accounts receivables / total sales) *number of days
Let’s take an example: over the month of January, ABC Ltd has sold for €50,000 worth of goods, with €35,000 in accounts receivable on its balance sheet at the end of the month. Its DSO is: (35,000 / 50,000) * 31 = 22.3 days. It means that on average in January it took ABC Ltd 22 days to collect payment after a sale had been made.
Thanks to these indicators, you will not only be able to make a precise assessment of your activity and financial performance over a 12 month period, you will also be able to make future projections. A complete annual review is the key to creating a forward-looking growth strategy.
For more tips and advice on business financial monitoring, download our ebook: Boost your financial performance analysis.