What is a SaaS Days Sales Outstanding (DSO)?

SaaS Days Sales Outstanding denotes the average number of days that a company is due to take to receive payment for credit invoices. It is an important operational metric that indicates how efficient the accounts receivable of a subscription company are. This measure is closely monitored because any changes directly affect cash collection efficiency and working capital. In fact, according to the Credit Research Foundation (CRF), monitoring the age of different invoice profiles is by no means an idle exercise, as it is just one way that a firm can be alerted to cash flow constraints before they arise.

Invoice analysis helps understand various operational factors that impact the financial health of the business:

• Liquidity Management: It gives an idea of the time taken to convert recurring contract revenue into cash readily available for operations and other uses.
• Early Warning System: It spotlights financial trouble or delayed payment in specific customer accounts before the situation worsens and leads to a reduction in cash reserves.
• Credit Evaluation: Besides internal billing processes, it is also a metric of the degree to which clients’ creditworthiness has been analyzed and successfully assessed.

Consider a mid-sized software company with monthly contract invoicing of $100,000. If its payment timeline slips from 30 days to 50 days, it effectively traps $66,000 of working capital in unpaid invoices—capital that could otherwise fund immediate product development or marketing.” 

To increase cash flow from operations, finance teams need to pay attention to how bills and invoices are handled. They have other options too, such as the following:

1.   Look at AR: Study the accounts receivable aging reports weekly to locate the overdue customer balances.
2.   Automate Dunning Processes: Set up a chain of automated notifications to remind customers about invoices that are due or that have become past due.
3.   Review Corporate Credit Terms: Establish a formal approach for credit evaluations and adjust terms for enterprise customers seeking extended payment periods.

Even as they make these improvements, the top management must still keep corporate considerations at the forefront of their minds. There is a potential relation between customers becoming accustomed to loose credit periods and their ability to adapt to shorter cash periods. Apart from that, they should check the software integration costs to automate the dunning workflows against the savings (expected in labor hours).

Traditional Business-to-Business (B2B) invoices are handled in ways more complex than those of cloud-based subscription models. It is common for routine business operations to involve manual credit approval, paper invoices, and payment intervals of 60 or 90 days. On the other hand, SaaS companies have brought their revenue models from nonrecurring contracts to subscription agreements supported by integrated payment gateways and credit card auto-charging.

If​‍​‌‍​‍‌​‍​‌‍​‍‌ you want to find out whether your company needs a more analytical approach to tracking invoice aging, here are some leading questions to help you think through it:

•   Is there a relationship between late payments from enterprise customers and the consistency of your monthly cash flow?
•   Is your company primarily billing corporations instead of offering automated credit card payments?
•   Has your finance department noted any shifts in the duration required for invoice collection?

It is generally expected that SaaS companies have payment cycles under 45 days since most use credit card subscriptions. Factors for continuous assessment include the volume of contract-based revenue, variations in write-offs, and the length of the cash conversion cycle, which relate to product development investment capacity.

It has been noted that specific calculation variances can influence the representation of financial performance and position for SaaS operators. A common practice involves cash-based upfront payments and credit sales

DSO =Total Accounts ReceivableTotal Gross Credit Sales x Number of Days

Because upfront cash sales carry zero outstanding accounts receivable, including them in the denominator artificially deflates your DSO score. This creates a false sense of security, masking the fact that your enterprise invoice accounts may actually be paying dangerously late. To conduct an accurate credit analysis, finance teams must isolate manual credit invoices from auto-charged digital transactions.