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Accounts Receivable Turnover: How do I calculate the Days Sales Outstanding of my Customers?

Accutrac 07-Apr-2015 0 Comments Permalink

calculating accounts receivable turnoverAccounts Receivable Turnover, also more technically known as Days Sales Outstanding (DSO), is a measure of the average number of days it takes for your trucking company to collect on accounts receivable invoices over a specific period of time. In short; it is tracking how fast your customers pay you. DSO is commonly used to analyze your company’s collection efforts, A/R trends and customer payment behavior. This important metric is vital in determining the financial health of your customer base, and also, the financial health of your company. 

Playing “bank” to your customer can affect your bottom line.

The ageing of the accounts receivables is a common challenge to most companies. If your company’s DSO greatly exceeds the payment terms you extend to your customers, then immediate measures must be taken to collect that cash. A healthy cash flow is of vital importance. It is highly recommended for your trucking company to assess its DSO on an ongoing basis. This exercise will help to prevent unnecessary credit risks.

Calculating the DSO is a simple equation. 

Divide your company's Outstanding Balance of A/R by the Total Sales generated during a period of time, and then multiplying the result by the Number of Days in the same period.

Total A/R Outstanding (at a point in time) ÷ Total Sales (over a period of time) x Number of Days (in the same period)

For example: If your trucking company has $300,000.00 in outstanding A/R and has generated $600,000.00 in sales over a 90 day period, then the DSO = 45 Days.

$300,000.00 ÷ $600,000.00 x 90 = 45

The speed with which your company converts its invoices into cash can have a tremendous impact on the overall health of your trucking business.

As a general rule of thumb, your company’s DSO should not exceed the credit terms you extend to your customers by more than a third to a half. So if your terms are 30 days, an acceptable DSO would be between 40 and 45 days. In the case of the above example, this trucking company has an acceptable DSO.

In an ideal world, your DSO should remain at a consistent low level. This would indicate that your company is collecting its receivables efficiently and in a timely manner. However, it is important to understand the following variables:

  • Seasonal Fluctuations: trucking companies experience seasonal volume variations. January and February can often prove to be periods of low volume, whereas, Spring and Fall are generally high volume times. The sales peaks and valleys that accompany these seasonal shifts usually result in skewed DSO numbers that do not necessarily reflect accurately your company’s financial status.
  • Growth Periods: if your trucking company increases its fleet size to service a new contract, then naturally sales will suddenly increase over a short period of time. This will certainly create a skewed DSO result as initially the increased sales will be disproportionately larger than your outstanding receivables. It may take several months for this ratio to correct itself and an accurate metric can be taken.

Tracking your DSO at regular intervals is important for two reasons:

First, it provides a measure to help predict cash flow which allows you to determine your company’s financial readiness for upcoming expenses.

Second, it clearly indicates potential credit risks as they develop. A consistently low DSO number shows your company performing well in collections. A consistently high or worsening DSO number is a definite warning sign that cash flow is stagnating and the risk of payment default by your customers is increasing. From a management perspective, it is easiest to monitor this activity on a trend line.

Monitor your DSO trends for sudden spikes to reveal upcoming cash flow problems.

Whatever measurement methodology is utilized, ensure it is consistent from period to period so that results will be comparable. In this manner, watching for a sudden spike in the trend line will effectively pronounce the probability of upcoming cash flow problems.

Trucking Companies use Invoice Factoring to Overcome Poor Cash Flow.

Due to the importance of maintaining healthy cash flow to sustain your trucking business, it is in your best interest to collect outstanding receivables as quickly as possible. By converting invoices into cash, your trucking company has the ability to pay the daily operating expenses needed to keep your fleet pulling loads and generating further revenues. To overcome the all too common scenario of poor cash flow, more and more trucking companies are turning to invoice factoring as a cost efficient means of gaining immediate access to working capital. The inherent benefits of invoice factoring (freight factoring) stretch well beyond the ability to access your cash reliably within 24 hours. These additional benefits include:

  • Accurate & efficient Accounts Receivable Management to reduce DSO
  • Free credit reports
  • Same day funding
  • Secure online access to view your account, 24/7
  • Regular and easy to understand reporting to monitor the status of your account

Knowing the DSO (Days Sales Outstanding) is important to understanding the state of your trucking company’s financial status. Having a financial management tool such as invoice factoring ensures reliable and immediate access to working capital.

For more information about cash flow management and the benefits of invoice factoring, contact Accutrac Capital online or call: 866 531-2615.

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