The easiest and most intuitive measure of working capital management is “days outstanding” often referred to as DSO. When applied to accounts receivable, it measures how quickly you’re collecting cash in days, and when applied to accounts payable, it measures how quickly you are paying vendors in days. For receivables, it’s calculated by dividing the amount of accounts receivable during a given period by the total value of sales during the same period (usually a quarter, month, or year), and multiplying the result by the number of days in the period measured. For payables, it’s the same math except your divide AP by all costs and operating expenses. Below are the DSO’s for publicly traded SaaS companies at the time they went public (generally just after the Series D for SaaS at that stage).
The typical receivable is outstanding for ~90 days. Although the range is very wide depending on customer size, the typical receivable has a median and average DSO of 83 and 84 days respectively. If you’re receivables are aged well outside 90 days, in a normal environment you wouldn’t be out of line asking customers to pay faster. If in the current environment your receivables are blowing out, that’s understandable. Make sure you’re in touch with slow paying customers frequently, offer discounts for quick payment (1% to 2% is normal), or suggest payment plans. Don’t let slow paying customers go silent on you and don’t just cut them off from your product without trying to work towards a solution.
Software companies pay vendors quickly. On the flip side, the DSO for payables is only 11 days on median. Software companies tend to pay their costs quickly, maybe a little too quickly. Vendors shouldn’t get upset with you if payments are made 30 days from invoicing.
Visit us at blossomstreetventures.com and email us directly with Series A or B opportunities at sammy@blossomstreetventures.com
Enjoyed this post?
Share it using the links below.