Cash flow is the most important part of any business. Without a steady flow of incoming revenue, any business will simply suffocate and cease to exist.
One of the biggest influences on a company’s cash flow and financial health is Days sales outstanding (DSO). As important as this concept is, many business owners fail to fully understand how carrying a high DSO (or high number of overdue receivables) can impact their overall cash flow.
What Exactly Is Daily Sales Outstanding?
Simply put, DSO is the average number of days that it takes a company to collect payment after a sale has been made on credit. As you might guess, the lower this number is, the faster you are getting paid for your goods or services, and vice versa. DSO is calculated using the following formula:
(Accounts Receivable / Net Credit Sales) X # of Days In Period
So if, for example, you have $25,000 in accounts receivable and your net credit sales were $100,000, your daily sales outstanding would be 91. In this case, if you had terms of 30 days on credit sales, you’d be doing a very bad job of collecting the money you are owed on time.
Negative Effects Of A High DSO
Having a high daily sales outstanding will have several negative effects on any company’s financial health. Lost revenue is one obvious effect, but there are several others:
- Accounts past 120 days overdue are less likely to ever be paid
- Cash is not available for reinvestment such as replenishing stock or expansions
- Loans taken to fill cash gaps will accrue interest
- Administrative costs for debt collection process
Tips For Reducing Your DSO
A problem with DSO is, in essence, a problem with your billing procedures. By structuring your billing system smartly and taking advantage of automation options, you can drastically reduce your DSO with very little extra effort on your part.
Taking advantage of some or all of the following options can even help prevent accounts from becoming overdue in the first place:
- Automatically charge customers via credit cards or ACH on their invoice due date.
- Implement payment recycling. This means if a card is declined, your system should be programmable to automatically try again at regular intervals of your choosing while still remaining in compliance with Visa/Mastercard regulations.
- Automatically notify the customer each time a payment is declined. The notice should direct them to a self-service customer portal that allows them to update their own payment information.
- Auto updater is offered by certain payment processors. If payment is declined because of a new card (whether it’s because the old one expired or because it was replaced) auto updater allows the new card to be billed for the charges without any involvement from the customer.
- When all else fails, the system should apply dunning strategies which is a series of progressively “stiffer” messages about late payment and the potential for late fees.
For each of the items above, you’ll want to be sure that you can configure the frequency, content of messages, etc.
If automated communication doesn’t do the trick, here are a few more features to look for that might make things easier:
- The ability to quickly pull aging reports so staff can be as efficient as possible in making outbound collections calls.
- The ability to make collection notes in the system with feedback from the customer.
- The ability to set reminders for further follow up.
And finally, providing a customer self service portal can go a long way towards empowering customers to update their own payment information.
These are all features a quality billing and payments platform should provide, so when researching and choosing a platform for your business, add the features included here to your list of must-have items.