How do you calculate the DSO?

# How do you calculate the DSO?

Temps de lecture : 3 minutes

### Sommaire

According to the Banque de France, the __average customer payment duration is 56.5 days __ (France).

Understanding **turnover of trade receivables **is essential for any company, especially in the B2B sector. This indicator is a cornerstone of cash flow and working capital management.

## Definition of the turnover period for trade receivables

The turnover period for trade receivables corresponds to ** the time it takes for trade receivables to be renewed ** is equal to the time needed to collect accounts receivable.

In other words, it's the time it takes for the company to generate sales equal to its current accounts receivable.

## How do you calculate the receivables turnover ratio?

To calculate the receivables turnover ratio, use the following formula:

*Accounts receivable turnover ratio = Net sales / Average accounts receivable *

If a company achieves net sales of €500,000 over one year, and the average accounts receivable over this period is €125,000, the ratio will be as follows: **500 000 / 125 000 = 4 **.

This indicates that the company has collected the equivalent of its trade receivables four times during the year.

## How do you calculate the DSO?

Accounts receivable turnover time differs from the turnover ratio in that it focuses on the time it takes for receivables to be renewed (usually in months).

The formula is as follows:

*Accounts receivable turnover time (in months) = 12 / Accounts receivable turnover ratio *

Let's take the receivables turnover ratio of 4, calculated earlier. The DSO in months would then be : **12/4 = 3 months **.

## How do you interpret your DSO?

The interpretation of DSO depends largely on the industry and the business model. Let's take two examples to illustrate the point:

### B2B E-commerce for office supplies

Turnaround time on trade receivables :

**2 months**

A period of 2 months is ** below industry standard **if it is ** 3 months **.

This indicates ** efficient receivables management ** and **a positive impact on **__BFR ____ (Working capital requirement) __. The company manages to ** convert receivables into cash more quickly **optimizing cash flow.

### Import-export international

Turnaround time on trade receivables :

**6 months**

With a 6-month lead time, **compared to the industry standard of 4 months **this **délai **is **trop long **.

This suggests that the company may have ** difficulties in collecting payments from its customers **This can hamper cash flow and increase WCR.

These comparisons show how important it is to contextualize trade receivables turnover time in relation to industry norms in order to draw meaningful conclusions.

**Shorter lead times generally indicate better customer credit management **more **an extremely short lead time can also mean an overly strict credit policy **potentially damaging to customer relations.

## Another calculation for your trade receivables: the trade receivables turnover ratio

This ratio measures the **frequency **at which the company achieves **collect trade receivables over a given period **.

*Accounts receivable turnover ratio = Annual sales / Average accounts receivable *

This is an essential indicator for **understanding speed **with which the company transforms its customer loans into cash.

### What's the right turnaround time for trade receivables?

Un **court ** DSO (Days Sales Outstanding) ** **is generally ** beneficial for the company's cash flow and WCR **.

A delay **trop court **may indicate that the company applies **strict payment terms ** that could ** damage customer relations **and, potentially, ** negatively impact future sales **.

The aim is to ** find a balance **between efficient receivables management and maintaining good customer relations.

### How can you reduce the turnover time of trade receivables?

One effective way of reducing this time is to use solutions such as ** Hero **.

This new form of **affacturage ** allows your company to ** receive immediate payment for unpaid invoices **This improves liquidity and reduces receivables turnover times. For more information, make an appointment with one of our advisors.

## Other useful ratios

In addition to DSO, other key ratios can provide valuable information about a company's financial health.

### Supplier turnaround time

This ratio measures the ** average time taken by a company to settle its debts to suppliers **. The formula is :

*Supplier turnaround time = (Supplier debts x 360) / Purchases incl. VAT *

If a company has supplier debts of €100,000 and purchases (including VAT) of €500,000, its supplier turnover time is (100,000 x 360) / 500,000 = (100,000 x 360) / 500,000 = (100,000 x 360) / 500,000 = (100,000 x 360). **72 days **.

### Inventory turnaround time

This ratio indicates the **frequency with which a company renews its stock ** over a given period. The formula is :

*Inventory turnaround time = (Average inventory / Cost of goods sold) x 360 *

With an average inventory of €50,000 and a cost of goods sold of €300,000, the inventory turnaround time is (50,000 / 300,000) x 360 =. **60 days **.

Effective management of ** DSO (Days Sales Outstanding) ** is essential to maintaining healthy cash flow and optimized WCR. By adopting strategies such as factoring with Hero, companies can effectively reduce this delay.

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