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We can’t talk about it enough. DSO – Days Sales Outstanding – is one of the most important KPIs in accounts receivable management. It represents the number of days it takes customers to pay their invoices. The DSO is inextricably linked to your company’s cash flow and is a measure of efficiency in the cash management process.
There are different ways to calculate DSO, but in the end only one thing counts: to have the lowest possible DSO figure. The lower your DSO, the better for receivables management and thus the health of your business. Your customers will pay their outstanding invoices quickly enough. And that in turn has a direct, positive effect on your company’s cash flow and liquidity position.
So what steps can you take to turn a relatively high DSO into a lower one? What factors contribute to a high DSO?
1. Collect information about your current DSO
Everything starts with gathering the information you need to determine your current DSO. Besides internal data, this also includes the competition: try to find out the DSO of similar companies in your sector and industry. This provides a great starting point for comparison and can serve as a benchmark to create realistic expectations. A DSO of 60 days may not be as good a score as you think if the average DSO in your sector is 40 days.
Seasonal fluctuations are also best taken into account. The DSO in the month of July is sometimes completely different from the DSO in December. To even out these monthly fluctuations, you can base DSO on the data for a full quarter or year.
All of this information also gives you a solid basis for taking a more strategic approach to managing and lowering DSO, and to do so on a sustainable basis. You could reduce DSO aggressively applying very strict credit terms. But this can have a negative effect on customer retention or discourage the customer from doing more business with you.
2. Efficient billing
One of the most effective ways to reduce your DSO is to make the billing process as efficient as possible. It all starts with sending out invoices on time; these must contain all the necessary information and be free of errors. Common errors include the inclusion of an incorrect amount or due date, an invoices that is not in accordance with the approved quote, the failure to mention payment terms or incorrect address information. While these errors can be corrected, they delay payment and negatively impact DSO.
Automation pays off in the invoicing process: you save time and human errors are excluded. Therefore, try to automate as many financial tasks as possible: send out invoices digitally, process payments digitally and try to avoid manual input whenever possible.
It also pays to review this process regularly. Do you send out invoices immediately after the project is delivered, or would it be better to do that immediately after signing the contract?
3. Optimise payments
Perhaps customers have trouble actually paying your business because a payment link is missing from email payment reminders or because the necessary payment details are missing from the invoice.
By offering digital payment options, you make it as easy as possible for your customers to pay. The aim is to remove as much friction as possible. Make sure that you also offer various payment methods, such as paying by credit card, direct debit or bank transfer.
4. Automated – and better – debtor management
As soon as invoices are sent out, the follow-up starts. It is therefore best to have a well thought out plan for debtor management. Better following up of outstanding invoices, through clearly defined procedures and automation, makes this part much more efficient.
With software such as iController you can automate different parts of debtor management and credit management and thus set up very efficient workflows for your teams.
You can be proactive and send out a payment reminder before the invoice’s due date, including a copy of the invoice. In most cases, customers have simply ‘forgotten’ to pay, and this friendly reminder can spur them on. If they are still unable to pay immediately, a proposal for a payment scheme or instalment plan may help. This way, part of the invoice is converted into cash more quickly.
If payment is not forthcoming, it is best to have a strategy ready for disputes and, if it comes to that, for collection.
5. Credit policy
Sound preparatory work means that the customer’s creditworthiness is thoroughly investigated, thereby reducing the risk of default.
A well-designed credit policy establishes the parameters and conditions that new and existing customers must satisfy in order to be able to buy on credit. This credit policy indirectly has an impact on the DSO figure. A credit policy that is too loose will result in longer unpaid invoices and therefore a higher DSO.
6. Communicating payment terms
An important determinant of DSO is the payment terms your company offers to customers. It is best to communicate these payment terms as clearly and transparently as possible. Therefore, make sure that they are easily accessible to customers, for example by attaching them to the invoice.
In addition, the payment terms should be drawn up in such a way that you do not put off customers by forcing them to pay too soon, for example, and that you offer them the right incentives to pay faster.
7. Offer incentives
You can reward good customers with a discount as part of the payment terms and the customer relationship. The size of that discount depends on the liquidity your company currently has and how much it is worth to you.
You can also give something extra instead of a discount, such as an additional service or a free product.
The reverse is also necessary: make sure there are consequences for customers who pay late.
8. Improve visibility
Reducing DSO is a joint effort. Not only the credit management team but also other departments and profiles can play their part. An unpaid invoice can be the trigger for further investigation into the cause of the non-payment. Perhaps there are connections to be made with the way sales are handled? Or the handling of other internal processes?
There are many ways to reduce your DSO. Efficiency, automation and digitalisation in the order-to-cash process are the common denominators. If you keep applying these strategies, your cash flow will improve over time. Just make sure you aim for a realistic DSO, fuelled by benchmarks and internal research.