3 Ways to Reduce your Company’s Days Sales Outstanding (DSO) | Behalf
How to Reduce Your Company’s DSO
As most corporate decision makers will tell you, one of the most difficult aspects of running a business of any size is getting paid in a timely manner. At the same time, getting customers to make their payments on time is crucial to improving cash flow and keeping your company afloat. For that reason, most companies invest in a robust accounts receivable department to track customer payments and optimize cash inflow. In order to measure the efficacy of their accounts receivable department, they monitor company DSO.
DSO measures the average number of days it takes your company to collect sales revenue after an invoice has been issued. It is a valuable performance metric for your company’s overall accounts receivable department health. A low DSO is a good indication that your company can quickly convert sales into cash, while a high DSO signals there is an underlying issue in its collections process. For instance, your company’s cash flow could be strained by overdue payments caused by passive collections practices or trade credits. Often companies that extend trade credits encourage poor spending habits and terms abuse across their customer base. If your DSO value is growing month to month, it could negatively impact company cash flow by tying up cash your business would otherwise have on hand to pay expenses and invest back into company operations.
Because DSO is a strong indicator of whether or not your company is struggling with cash flow, it is important to measure DSO on a regular basis to proactively manage it. Read on for 3 ways to tackle and reduce your company’s Days Sales Outstanding.
1. Automate your billing processes.
To keep your DSO value down month-to-month, it is important that your accounts receivable department has an efficient payment collections process. Clear terms and timely billing are crucial components of any collections strategy. The faster you invoice customers, the faster your company receives their payments. For companies that still rely on a paper billing system, migrate to electronic invoicing. Digital payment options like Behalf can make it easy to shrink your DSO by streamlining your company’s billing process electronically, speeding up the time it takes your company to invoice its customers. By eliminating manual and paper-based payment processing, automation limits the chance for human error. The switch would also systematize the collections process for your company, allowing it to bill customers instantly, making it easier to track payments as they come in and speed up collections, dramatically lowering DSO. Having less cash tied up in accounts receivable pumps cash back into your company.
2. Send out consistent payment reminders.
Keeping customers up to date on their payments is essential to keeping your company on track and reducing DSO. In addition to having a clearly defined payment process from the onset, an easy way to hold customers accountable and make sure unpaid invoices are not ignored is to send out consistent payment reminders. Instead of simply emailing reminders, your accounts receivable department should follow up via multiple channels of communication like text reminders and collections calls. By following up over the phone after the initial invoice, you add a personal touch to your collections process, strengthen your existing customer relationships and ensure outstanding invoices get paid. Also consider rewarding early payers and charging fines for customers who are consistently paying late.
3. Offer customers more payment options.
Ideally your company’s DSO should be no more than 10 to 15 days longer than its terms of sale. This means your financial plan should anticipate receivables generally arriving 10-15 later than your published terms: (Net 30 becomes 30+15). If you can’t afford to float your customers 45 days, you will need to adjust your payment terms. While it is important that customers are not taking advantage of payment terms that are too generous, maintaining a healthy cash flow does not mean that your company cannot offer a competitive payment policy. To eliminate collections altogether and close the gap on DSO, you can allow customers to pay with a third party credit line. By accepting third party lines of credit from financial providers like Behalf, your customers get flexible terms and you still get paid on time. Behalf provides your customers with fully customizable payment terms that help them control their cash flow. They will have the option to extend payment for up to six months on each purchase and, regardless of the terms they choose, you will get paid immediately. Behalf solves your DSO problem and simultaneously allows you to offer best-in-class payment terms.