Analysis of Customer Payment Situation Using Calculation of Days of Sales Open (DSO)
This document explains how you use Days of Sales Open (DSO) calculation to monitor how a customer is performing over a longer period of time.
DSO is a financial indicator that shows the age, in terms of days, of a company's accounts receivable, and the average time it takes to turn the receivables into cash.
Outcome
A DSO value, that is, an average time for payment of customer invoices measured in days, is calculated based on the customer's payment behavior. The values for sales development and the DSO value are translated as one DSO action code for each customer, representing a specific payment trend.
Use the DSO value in sorting orders and reports as a value type in the column template for the accounts receivable balance file.
Use the DSO action code in 'Credit Monitoring. Process' (RMS420) to define which customers should be contacted and if further measures should be taken: Changing the credit limit, number of days before due date, payment method allowed, for instance.
The DSO value and the DSO code update the accounts receivable file (FSLEDG).
Before you start
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The financial system must be configured. See the following document:
- Values for DSO calculation must be defined in 'Settings – DSO Calculation' (RMS900).
- Values for credit monitoring must be defined in 'Settings – Credit Monitoring' (RMS905).
- A customer must be registered in 'Customer. Open' (CRS610).
- Transactions must be recorded for the customer during the time range covered by the calculation.
What is Days of Sales Open (DSO)?
Days of Sales Open (DSO) is used to refer to both the entire DSO analysis (see below) and the DSO value used in the analysis.
The DSO analysis is used to compare trends in sales and trends in the customer's payment behavior. The analysis thus indicates potential problem customers before they become problem customers.
The DSO value, which is retrieved during the analysis, measure the cash flow, the credit time the customer is currently using. More exactly, it is the average time for payment of customer invoices measured in days.
DSO Analysis – Overview
The DSO analysis is automatically done in six steps in M3:
- Calculating the customer's credit time for the period analyzed
- Calculating the average credit time over a period of time
- Measuring the sales for the period analyzed
- Measuring how sales is developing over a period of time as an average
- Comparing the changes in credit time and sales between the period analyzed with the previous periods based on the values retrieved
- Translating the result of the comparison as a code indicating the payment trend.
Calculating the Customer's Credit Time and Measuring the Sales Development
The DSO value is calculated in the following way: (Total receivables/Total credit sales in the period analyzed) x Number of days in the period analyzed
Cash sales are excluded.
Both the DSO value and the sales development for the period analyzed are compared to average values from previous periods.
Payment Trends Displayed as DSO Codes
The result of the comparison of the customer's cash flow and sales trend is summarized as a code describing this relation. The codes are displayed in 'Credit Monitoring. Display per Payer' (RMS421/B), if applicable; the program is called from (RMS420).
There are six DSO codes:
| Actual Credit Time (DSO Value) | Sales Increase | Sales Decrease | Sales Not Changed |
|---|---|---|---|
| Increasing | 1 | 2 | 5 |
| Decreasing | 3 | 4 | 6 |
Explanations
1 = Both the customer's credit time and sales have increased at the same time. Comment: This is normal and no action is required.
2 = The customer's credit time has increased but the sales have decreased. Comment: The customer might have financial difficulties. Action must be taken.
3 = The customer's credit time has decreased but the sales have increased. Comment: This is not a normal development but is in fact a positive sign. No action is required.
4 = Both the customer's credit time and sales have decreased. Comment: This is normal and no action is required.
5 = The customer's credit time is increased but the sales are unchanged. Comment: The customer might have financial difficulties. Action must be taken.
6 = The customer's credit time has decreased but the sales are unchanged. Comment: This is positive and no action is required.
DSO codes are represented by value type 31 in 'AR Inquiry Column Template. Open' (ARS066/F). Consequently, the latest DSO code set for the payer can be displayed when reviewing information in 'Accounts Receivable. Display Balances' (ARS225).