There are only and two technical terms we refer to in the programme DSO (pronounced D-S-O or D-SO) and WADSO (pronounced WAD-SO). Don’t get distracted with all the other cash/credit control jargon like Collection Effectiveness Index, Transaction Turnover per Cash Applicator, etc. They’re too complicated and aren’t used in this programme. This programme is focused on real results that are measured on ‘cash in the bank’. Real results use are achieved using the combination of DSO and WADSO.
Before getting to DSO, let’s be very clear on what a sale is and also what constitutes an invoice. The issues that many business owners experience in collecting payment from their customers may have nothing to do with their product or its delivery, indeed in many cases poor management of the documentation and invoicing are the real culprits. People moan about paperwork, this is a smart cash flow programme, so be smart and get yours right.
A sale is when the correctly executed provision of a service, or the delivery of goods that are fit for purpose, is completed. In other words, the provision of the goods/services is indisputable (let’s call this Quality). Only when Quality has been delivered can an invoice be issued. Don’t waste your time, or confuse your ultimate target of achieving a low DSO figure, if you’re not delivering Quality.
Once you’re sure of the Quality, then move to the invoicing of that sale. It is crucial that the invoice contains all the correct data when being prepared (more on this later). If the invoice is wrong (because of incorrect data) then it will go back and forth between your office and your customer’s before it’s finally correct. Only then should the ‘DSO clock’ start.
Based on a clear understanding of the above, Day Sales Outstanding, or DSO, is the amount of days it takes from the date on the invoice, to actually receiving payment in full, that appears on your bank statement. Most DSO definitions forget to mention the payment must appear as cleared funds in your bank. That’s probably because they don’t consider the real world situation where payments can and do ‘bounce’.
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