Why DSO is the Most Important KPI for Most MSPs
Understanding your DSO is an important part of managing your cash flow.
Understanding DSO
DSO measures the average number of days it takes for a company to collect payment after a sale has been made. In the context of MSPs, it gauges the efficiency of converting provided services into cash. A lower DSO indicates that the MSP is able to collect payments quickly, thereby ensuring a healthier cash flow. On the other hand, a high DSO can strain liquidity and impact a company's financial stability.
Why DSO Matters
DSO offers invaluable insights into the financial health of an MSP. Here's why at FlexPoint we think DSO is the most important KPI for most MSPs:
1. Cash Flow Management: Efficient cash flow management is vital for any business. A lower DSO means that cash is being collected faster, allowing the company to meet its operational expenses, invest in growth, and withstand economic fluctuations.
2. Liquidity: MSPs rely on timely payments to manage their daily operations and expenses. A prolonged DSO can tie up funds that could be better utilized elsewhere.
3. Risk Assessment: A high DSO might indicate issues with client creditworthiness, payment processes, or communication gaps. Identifying and addressing these issues can prevent potential revenue losses.
4. Growth Opportunities: Lower DSO can provide the financial flexibility needed to seize growth opportunities, such as expanding services or entering new markets.
Calculating DSO
There are a number of ways to calculate DSO but the simplest approach is to divide your accounts receivable at the end of the period by your gross sales over the same period of time. You then multiply this number by the number of days in the period. This is what is called the simple DSO formula, which is useful for a majority of MSPs since there typically is not any seasonality to the business. At FlexPoint we have created a simple to use calculator where you can calculate your DSO and also see how it compares to the market generally.
Click here to download FlexPoint DSO calculator
How FlexPoint Can Help You Reduce Your DSO
On average, FlexPoint partners have a DSO of less than 30 days. FlexPoint helps MSPs reduce their DSO by automating billing and invoicing. By leveraging FlexPoint's powerful autopay features, MSPs can collect payments faster and reduce to DSO dramatically. Reach out to learn more how FlexPoint can help you reduce your DSO.
