As explained in the Day Sales Outstanding [DSO] article, there are only two technical terms we refer to in the programme DSO (pronounced D-S-O or D-SO) and WADSO (pronounced WAD-SO). Once you’ve read and understand how DSO is calculated, WADSO is the tool that measures performance i.e. how effective your cash collections are. WADSO is short for Weighted Average Day Sales Outstanding.
The previous article defined the sale and invoice components used to count the number of days in the DSO. With DSO clearly defined, WADSO can be calculated. Takes the sample list of invoices below as an example. The average days that these invoice is outstanding is 54 days, or a little under two months. If you called your credit control people and asked them what the average DSA was, a DSO of 54 doesn’t sound too bad. However, this is not an accurate measure of the real average days outstanding because it does not take into account that there is one big invoice for 1,000,000 that hasn’t been paid for three months!
|Invoice No.||Face Value||DSO||SumProduct||Weight %||WADSO|
The purpose of the weighted average is to give a more accurate representation of the average amount of money across the entire book of outstanding debt. To accurately measure this, each DSO is weighted in order to provide a more accurate payment analysis. Using each DSO weighting, the Weighted Average Day Sales Outstanding [WADSO] is actually 89 days. This is three months and almost double the DSO average figure.
Using the above table of date, SumProduct is calculated by multiplying the two known values: Face Value and DSO and WADSO is calculated by dividing the SumProduct by the total SumProduct to get a Weight for each payment received. The Weight is then divided by the DSO to get the weighted value for each payment. Only then can the WADSO be calculated
WADSO = Total SumProduct / Total Face Value
As you move through this Smart Cash Flow Programme, WADSO is used to measure the true performance of your cash collections/credit control personnel.