In the first part of this series we looked at the first piece of the cash conversion cycle – Days Inventory Outstanding. Next, we will dive into the next piece of your CCC, Days Sales Outstanding (DSO).
Your DSO is an important measure of how many days it takes you to collect your money after a sale has been made. If your business extends payment terms to your customers then this is a very important piece of your cash conversion cycle.
It’s important for start-ups to manage their cash closely. And, the faster you can turn your sales into cash the faster you can put that cash to work growing your business. You may decide to experiment with different payment terms to see if you can incentivize your customers into paying early and shortening your DSO.
Let’s say AFAB Inc.’s total amount of credit sales for December was $99,685 and their total number of receivables was $96,557. That means their DSO for December is 30.96. That means it takes AFAB Inc. an average of 31 days to collect their receivables from their customers.
If they decided to extend early payment discounts and their receivable balance dropped from $99,658 to $75,650 that would reduce their DSO to only 23 days. With this example you can see the benefit of managing your receivables carefully and the impact it can have on your cash conversion cycle.
Next, we will dig into the third part of your CCC – Days Payable Outstanding.
If you would like to hear more about how HuddleBoards can help you track your cash cycles visit us at www.HuddleBoards.com.