How to Close the Gap on Your Days Sales Outstanding (DSO) | Behalf
How to Close the Gap on Your DSO
How effectively do you monitor your accounts receivable department? Every company gets paid on a unique timeline that’s largely dependent on its business model. To evaluate the efficacy of your company’s payment processing, look at your company’s DSO. DSO measures the average amount of time it takes for your company to collect payment on its sales. The lower the DSO, the faster your company profits from its sales. Your company’s DSO is ultimately tied to its cash flow. Companies need a certain amount of cash on hand to be able to cover operational expenses so they can keep running. DSO is a strong indicator of how long your company’s profits remain tied up in its cash flow.
DSO is typically a pain point for companies that extend trade credit to their business customers. Net payment terms give business customers more flexibility to purchase goods for their business, regardless of where their company is in the business cycle. In theory, offering extra flexibility to customers should increase a company’s sales and give them a competitive edge. In practice, however, trade credit leaves companies in a lurch, as they wait for business customers to honor their payment terms. Find out if your company’s trade credit program is doing more harm than good. Calculate your company’s DSO with the following formula:
(Accounts Receivable/Total Credit Sales) x Days in Period
In order to complete the above calculation, decide over what period of time you want to measure DSO. Whether it’s quarterly, bi-annually or annually, you will multiply the number of days in this period with the quotient of your company’s total dollar amount of unpaid invoices divided by the total dollar amount of paid and unpaid invoices. Note: this calculation excludes any cash sales.
Now that you have a number to work with, compare your company’s DSO with its actual net terms offering. Best case scenario, your DSO falls within 10 to 15 days of your company’s payment terms. A DSO that’s significantly higher is a sign that your company needs to modify its collections process: trade credit is costing you more than it should. Your company should make every attempt to reduce its DSO. The longer your company’s DSO, the more strain is put on its cash reserve. This article offers ways your company can reduce its DSO so it can reap the full benefits of its sales.
How to Reduce DSO
Small payment Incentives like a discount for customers that pay within a certain amount of days can effectively lower DSO and speed up the payment process, but not as dramatically as outsourcing collections all together. If your company is still dependent on a paper billing system, switch to electronic invoicing. Digital payment services like Behalf allow vendors to invoice their business customers instantly. All their customers have to do is click to pay and their vendors receive payment within 24 hours. Services like this are convenient because they automate the collections process, making it easier to track payments and cutting out the cost of postage.
If trade credit is hiking up your company’s DSO, it is time to make changes to your payment policy. Avoid the “Net 30 Trap,” where customers take advantage of generous terms by continuing to pay 15+ days late. Offering competitive payment terms does not have to put your company’s cash flow in jeopardy. Consider expanding your credit offering with a mutually beneficial financial product. Offer your business customers a credit line with built in payment terms. If your customers leverage a third party credit line to pay, they get the terms they want and you still get paid immediately. Behalf offers purchasing credit lines with flexible, six month payment terms. Your business customers get qualified for buying power today and shift their recurring payments to this method. Make your customers’ payment timeline someone else’s business and close your DSO gap once and for all.