Knowing your customer payment behavior can help you to control and reduce DSO. If you know your customer payment behavior you can shape your Credit Policy to achieve the DSO level that is a happy medium for your financial and commercial needs.
Predictive Customer Behavior
Determining which actions are the best to take is dependent on knowing your customer payment behavior. Don’t try to guess what your customer payment behavior is. This may result in incorrect data and conclusions, which could cause you to take the wrong actions, possibly increasing DSO further. Instead, use predictive customer behavior based on actual customer payment behavior, and information gathered on customer accounts payable payment policies and procedures.
Here are some steps to take to gather the information needed for predictive customer behavior.
Payment Commitments
For past due accounts, the best predictor of when they will pay is a payment commitment. Asking for and getting a payment commitment from a customer usually results in predictable payment behavior.
Customers are unlikely to renege on a payment commitment because it could cause a loss of trust, and result in being placed on credit hold, and/or referred to collection.
Days Payable Outstanding Policies
The policy your customer has on Days Payable Outstanding can have a direct impact on customer payment behavior. If the credit terms you offer is Net 30 Days, but your customer’s policy on Days Payable Outstanding is 45 days, it is more likely than not that your customer will pay you in 45 days, except for special circumstances.
Accounts with Days Payable Outstanding policies have predictive payment behavior. Knowing when an account is likely to pay can be beneficial to you in several ways:
- DSO – makes predicting, managing and controlling DSO easier and more effective.
- Credit Policy – helps to evaluate if your credit policy is realistic or needs to be adjusted.
- Collections – makes collections more efficient by obviating the need to make unnecessary collection calls.
Accounts Payable Procedures
Knowing your customer AP procedures will make customer payment behavior more predictive. If your customer has an AP procedure where invoices processed before the 15th of the month will be paid by the 1st of the following month, the timing of your invoice can result in payment ranging from 15 to 45 days. If your terms are Net 30 Days you may be paid anywhere from 15 days early to 15 days late.
Customers with AP procedures have predictive payment behavior. Knowing customer AP procedures can be beneficial to you in the same ways discussed for Days Payable Outstanding.
Tracking, analyzing and predicting customer payment behavior is very difficult unless you have the technology available in automated accounts receivable and collections. With automation your AR team will have the resources to stay ahead of the curve on DSO.
The key to successfully automating accounts receivable and collections is to work with an experienced software partner.
Lockstep Collect is a market leader in cloud-based credit and collection platforms. Lockstep Collect can help you implement the technology applications you need to reduce and control DSO.
If you would like to learn more about how you can benefit from automating accounts receivable and collections, please contact Lockstep Collect at www.lockstep.io.
