The company could lower its debtor balance and hence lower its DSO to a more acceptable level by selling one or more invoices for cash.
Companies that sell on credit will as a consequence create debtors - customers who owe the company money for their purchases.. The longer their invoices remain unpaid, the greater the credit risk to the company that the invoice will never be repaid.
Days sales outstanding (DSO) (also known as Debtor Days (DD)) is a term that shows numerically the average time to collect money off debtors.
For example, assume a company has a total of £1m of credit sales over a 6 month period and at the end £0.3m are outstanding. Its credit sales per day are £1m/180 = £5555 so its DSO is £0.3/£5555 = an average of 54 days.
DSO should be used to observe trends. If the DSO increases it indicates a worsening situation of the company (increasing credit risk) because debtors are taking longer to pay their debts to the company (a bad sign that they might be experiencing cash problems).
Note that DSO is an average so individual companies in cash trouble will not be identified. For that the company should produce an aged debtors' report.
What is single invoice finance?
Cash for Invoices Limited offers single invoice finance (sometimes called spot factoring or selective invoice finance) - a type of debt factoring that has key advantages over conventional debt factoring and invoice finance: