Definition
Days Sales Outstanding (DSO) measures the average number of days it takes your practice to collect payment after providing a service. Think of it as a report card for your billing department. A lower number of days signals high performance and healthy cash flow, while a higher number indicates potential problems in your revenue cycle. The industry benchmark for a well-run practice is typically 30-45 days.
Why This Matters to Healthcare Providers
Your DSO is a direct indicator of your practice’s operational and financial health. A potential buyer or investor will look at this number immediately. A low DSO suggests your billing and collections processes are efficient and predictable. A high DSO is a red flag, signaling to buyers that they may inherit collection problems, unhappy payers, and an unreliable revenue stream, which can lower your practice’s valuation.
Example in Healthcare M&A
Scenario: Two orthopedic practices of similar size and specialty are for sale. Practice A has a consistent DSO of 35 days. Practice B has a DSO of 68 days.
Application: A private equity firm evaluating both practices sees Practice A as a well-managed asset with strong operational controls and predictable cash flow. They view Practice B’s high DSO as a significant risk. They assume its accounts receivable includes a large amount of old, likely uncollectible debt and that its billing processes are broken.
Outcome: Practice A receives a premium valuation offer. The buyer reduces their offer for Practice B to account for the poor-quality accounts receivable and the money and effort required to fix its revenue cycle. Practice B’s owners leave significant money on the table because of their operational inefficiency.
Related Terms
- Revenue Cycle Optimization – This is the process of improving your billing and collection systems specifically to lower your DSO and increase cash flow.
- Clean Claim Rates – A high percentage of claims paid on the first submission leads directly to faster payments and a lower DSO.
- Collection Rates – The percentage of money you actually collect versus what you bill is closely tied to DSO. A high DSO often correlates with lower overall collection rates.
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Frequently Asked Questions
What is Days Sales Outstanding (DSO)?
Days Sales Outstanding (DSO) measures the average number of days it takes your practice to collect payment after providing a service. It acts as a report card for your billing department, indicating the efficiency of your collections process.
Why is DSO important to healthcare providers?
DSO is a direct indicator of a practice’s operational and financial health. A lower DSO means efficient billing and collections, while a higher DSO signals collection problems, unhappy payers, and an unreliable revenue stream, which can negatively affect the practice’s valuation.
What is considered a good industry benchmark for DSO in healthcare practices?
The typical industry benchmark for a well-run healthcare practice is a DSO of 30-45 days, indicating healthy cash flow and strong operational controls.
How does DSO impact healthcare mergers and acquisitions (M&A)?
In healthcare M&A, a lower and consistent DSO suggests predictable cash flow and strong operations, resulting in a higher valuation. Conversely, a high DSO is viewed as a risk due to likely uncollectible debt and broken billing processes, leading to reduced offers for the practice.
What related terms are important to understand in connection with DSO?
Key related terms include Revenue Cycle Optimization (improving billing and collection systems to lower DSO), Clean Claim Rates (claims paid on first submission leading to faster payments and lower DSO), and Collection Rates (percentage of billed money collected, which correlates with DSO).