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How Is Working Capital Management & DSO Different For Software Vendors On Annual Contracts?

Asked on April 7, 2015

"How do you recommend a software business that sells annual recurring contracts think about working capital mgmnt? Is the traditional D.S.O. metric meaningful when revenue is amortized over 12 months? "

This question was asked at a recent webinar, now available on-demand:

"Essentials of Working Capital Management: Trade Credit & Collections"

Please add your thoughts about it below. Thanks!

Answers

Ken Parkinson Managing Director • April 7, 2015

Working capital for service firms, which I assume a software business's recurring contracts can be regarded, is reduced by the absence or small amount of inventory (as compared, for example, with a hardware manufacturer). I wouldn't really recommend DSO unless you can compute similar measures for competitors. Then you could measure performance vs. the competition. The Credit Management Institute (I'm not sure I got the name exactly correct) used to sell DSOs by industry. It might be worth checking that site out. Alternatively, you could still compute an average day's sales even if the amortization were >12 months. I'd mention, though, just because things are amortized over 12 months, it doesn't mean you cannot use a smallr period for your DSO calc.

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