Euler Hermes World Agency Insights Understanding the true cost of a rising Day Sales Outstanding (DSO)

Can three days' difference really cost that much?

By giving a real example of DSO impacting receivables, we can see clearly what an essential tool DSO monitoring and awareness is both for those managing risk and those developing financial and risk strategies. For example, if we look at a €4 billion turnover business with €555 million in accounts receivables. If this company has an average DSO of 50 days, the total accounts receivables jumps by €33 million if the DSO moves by just 3 days.

If we assume a funding cost of a modest 3%, then those three days are costing your business another €1 million per annum.

It might indeed be costing you more in falling orders and increased costs, as buyers look to mitigate their own risk, and shift to a new supplier.

Benchmarking performance

DSO is an essential benchmark of collections performance.

It helps you to better understand and mitigate the risk of new markets, sectors and buyers. But it can also impact external perception of your business.

A business with a low DSO suggests a company whose cashflow is strong, borrowing is under control, and has a professional grasp on its credit and risk management strategies. It allows you to differentiate your business from your peers, and secure your status as a preferred supplier.

A business with a higher DSO, conversely, may be a company that is struggling, whose cashflow is under pressure, and whose borrowing to fund the cashflow 'gap' is a source of concern. If that DSO continues to rise, it could signal a journey from which there is no return.

A price worth paying?

Businesses that reduce their DSO are often looked upon favourably by buyers, banks and trade credit insurers. Some even negotiate their policy premiums accordingly, since they represent less risk, as they will suffer lower bad debts. A shift downwards in DSO is more likely to result in falling loss ratios, and creates less likelihood of buyer default.

A shift of only a few days in the opposite direction, on the other hand, can have serious consequences both in your own performance, and in how you are perceived by your customers.

Global statistics often need to be unpicked. Individual markets or sectors can distort the total picture. Drill down even deeper into these figures, and everything is not quite as it seems. Understanding how DSO can be impacted will help you better recognise and manage risk.

The Euler Hermes Economic Report Series is designed to give you unique insights into managing risk.

Euler Hermes continues to monitor DSO and other critical payment and economic data to help you navigate you through this complex environment.

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How can we help you

Euler Hermes actively monitors DSO performance and other critical payment and economic data to help customers better manage risk. Euler Hermes World Agency supports multinational companies who require the highest levels of risk coverage alongside real-time risk management information and intelligence. Enjoy the support of a strong AA- rated partner.

Discover how we can help your business manage risk today - Contact us