Do you DSO?


Although cash flow is on everybody’s mind, few people know about days sales outstanding (DSO), and fewer still truly understand the impact on their cash balances or lines of credit.

What is DSO? It’s the average amount of time, expressed in days, your customers take to pay you for a load once you have hauled it. To understand DSO, consider a single haul. Suppose that you deliver a load on the 1st of the month, and the shipper pays on the 25th. The number of days the sale is outstanding is 25.

To determine what’s happening during those 25 days, you can break DSO into external DSO and internal DSO. External DSO is the time between issuance of the invoice and collection on that invoice. Internal DSO is the time it takes you to generate that invoice after the shipment has been made.

The average external DSO for your entire company is a critical measure of your accounts receivable and customer management. Here’s how to compute it: First, figure your “average sales per day.” To do this, take your annual sales, and divide by 360 days. For example, $1,000,000 in annual sales divided by 360 equals $2,777 per day.

Next, divide your total accounts receivable by this average sales per day number. Continuing our example, suppose you had $100,000 in receivables at the end of last month. Dividing by $2,777, you get an external DSO of 36 days.

Why is this important? If you can permanently lower the overall DSO collection period by several days, you will put a lot of cash in the bank.

In our example, for every $1 million you have in sales, lowering external DSO from 36 days to 26 days puts $27,770 in the bank. For a company with $10 million in sales, this is more than $270,000 that you can apply to the cash account or use to reduce the line of credit or accept valuable purchase discounts by paying vendors earlier.

Remember, this is just external DSO. You can also build up cash by shaving days off your internal DSO.

To determine the internal DSO, add up the unbilled loads at any given time. Generally, you can get this off a computer report, but you must also add any loads delivered in the last day or two that haven’t even made it into the unbilled loads report.

Suppose our fictitious company has $30,000 in unbilled loads. By dividing this number by the average sales per day of $2,777, you get 10.8 internal DSO. Is there anything you can do to reduce average internal DSO by getting the paperwork back from the drivers faster?

When you add the internal DSO of 10.8 days and external DSO of 36 days, you have 46.8 days total DSO between the ship date and the payment date. By working to cut days in both areas, you might be able to find 10 days worth of money. Even three or four could make an impact on your cash flow.

Tracking these trends and numbers as part of your standard weekly or monthly financial executive-trends report would help management focus on the importance of these items. If you regularly measure DSO, you can begin to manage it, and in the process, greatly improve your company’s cash flow.

Kenneth dewitt is a CPA and certified financial planner who serves as a part-time chief financial officer for a variety of businesses, including trucking companies. E-mail

For more on how to chart your accounts receivable cycle, see Chapter 4 of the Small Carrier University manual, How to Manage Cash Flow, by Kenneth C. DeWitt & E. Bryan Finison. You can read the manual online at