The target DSO is the average payment period the company sets for itself, expressed in days. It serves as a benchmark for measuring whether collection efforts and credit management are effective.
Example
An SME has a DSO of 58 days, even though its payment terms are 45 days. It sets a target DSO of 50 days by the end of the year, then tracks the difference between the actual DSO and that target each month.
Why It’s Important
Without a specific numerical target, it is difficult to know whether the recovery efforts are paying off. The target DSO is generally set based on the payment terms granted, the industry, and the company’s history, and is then broken down by team or by customer.
For more information: The 7 strategies for reducing DSO and the 10 key accounts receivable metrics.
See also: DSO, customer DSO, contractual payment terms.
