DSO is driven by customer payment behavior and ability to pay. Customer payment behavior and ability to pay can be influenced by internal and external factors.
Internal factors are easier to understand and quantify, making it less difficult to estimate the impact on customer payment behavior and resources. The risks and impacts of external factors, however, can be very difficult to understand and quantify. They can be very significant, and develop unexpectedly and quickly. The impact of external factors on DSO can put you into a precarious position very quickly. That is why it is important to understand the risks associated with external factors early.
Here are some examples of external factors that can change customer payment behavior and ability to pay with corresponding negative impacts on DSO.
Public Health Emergencies
The coronavirus (Covid-19) was unexpected and developed into a global pandemic in a few months. The impact on the economy and many businesses could be significant. Many companies may start to pay late and experience a dangerous depletion of their financial resources.
General Economy
Economic slowdowns and recessions can place strains on customer payment behavior and financial resources.
Geo/Political Events
Events caused by geographic or political turmoil like the oil price war started by Saudi Arabia and the trade war with China, can happen suddenly and force many companies to resort to late payment behavior and reduce financial resources.
Declining Industries
The fossil fuel industry has seen a precipitous decline in its fortunes due to global warming concerns, renewable energy alternatives and geopolitical developments.
Supplier Concentration
Placing too much reliance on one or a few suppliers can expose customers to supply disruptions caused by any number of factors such as Covid-19.
Customer Concentration
Having only one or a few customers increases the risk of a catastrophic loss of business, resulting in late payment behavior and deterioration in financial resources.
Competition
The advent of new or stronger competition, such as Amazon’s impact on retailing, can cause major changes in customer payment behavior and financial resources.
New Technology
New technology can develop commercial acceptance quickly, threaten the ability of companies to pay and deplete their financial resources. Some examples are ride hailing services (Uber) and video streaming (Netflix).
It would be impossible to be fully prepared and able to deal with all external threats and the possible impact they may have on DSO. The best way to protect your company is to aggressively manage and control DSO, so that if an unforeseen event threatens your company, you are not already caught in a cash trap with overextended DSO.
The most effective way to stay ahead of the curve on DSO is to utilize the technology available with automated accounts receivable and collection.
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 how you can benefit from automating accounts receivable and collections, please contact Lockstep Collect.
