I have recently met with some small business owners who do not know what their DSO is, or if they do know it, they don’t know if it is good or bad.  For those of you who don’t know, the DSO is a measurement of how quickly a company collects its cash.  The quicker you collect your cash, the lower your DSO.

So how low can you go?

The average DSO for each industry varies – your goal as a small business owner is to have your DSO at or below the average – Best-in-Class is always better than average.

Each time I meet with a prospective client, I do a FREE Financial Analysis of their business.  DSO is almost always a point of discussion.  Within the last month, I have met with prospective clients with DSO’s of 83, 91 and 100 days.  Although they were in different industries, the industry average for their peers was 45 days. 

Great Stuff – what does it all mean?

Essentially it means, these companies are acting as banks for their customers for 38, 46 and 55 days respectively.  Two of these companies had annual revenues of $10 million, and thereby were “loaning” their customers approximately $850,000 – interest free.  Good for the customers, not good for these companies.

Why are they doing it?

This is what I hear:

• We don’t have time to call/we need a process…
• All my customers eventually pay
• My largest/best customer will get mad if I call him/her/them
• I expect $ in bad debt each year.

The common theme here is … a lack of a strategy.    

What can a successful strategy do?

I recently helped a company lower its DSO from 80-90 days to 37-45 days.  It was a company with revenues of approximately $6 million a year.  On average, we reduced Accounts Receivable from $1.5 million to $750 thousand (which ends up in the company bank account).

How?  It was a four step process:

• Weekly meeting
• Periodic phone calls and e-mails
• Management intervention
• Follow-up

At the risk of stating the obvious, the benefits to a low DSO are numerous

• The business owner gets to focus on building his/her business – rather than financial management/administration
• Ability to pay bills on time (or within discount terms)
• Your Line of Credit (LOC) renewal meeting should go much better
• You will sleep better at night (my favorite)

So, how low can you go?