If you could track only one number about your customers, Days Sales Outstanding (DSO) would be a strong candidate. It tells you, on average, how many days pass between making a sale and receiving the money.
How to calculate it
The simple version: divide the receivables you are owed at period end by the credit sales for the period, then multiply by the number of days in the period. For example, if you are owed 30 lakh at month end and made 90 lakh of credit sales in a 30-day month, DSO is 30 / 90 x 30 = 10 days. These figures are only an illustration of the arithmetic.
What a rising DSO usually means
- Customers are paying later, or a few large customers have stopped paying on time.
- Invoices are being raised late, so the clock starts late.
- Disputes or short deliveries are holding up payment.
- Collections follow-up has become irregular.
Look at the average and the ageing together
An average can hide a problem. A DSO of 45 days might be many customers paying around 45 days, or most paying in 20 days and a few not paying at all. An ageing report, which groups unpaid invoices into 0-30, 31-60, 61-90 and 90+ days, shows which one it is.
DSO tells you how fast you are collecting. Ageing tells you who is not paying.
What to do about it
Start with the largest overdue balances and a fixed weekly follow-up rhythm. Agree payment terms clearly before the sale. Raise invoices the day goods or services are delivered. Then track DSO monthly so a drift is seen in weeks, not at year end.