To keep a business running, you need cash flow. As obvious as this is, cash flow isn’t always what it is expected to be. You may make a lot of sales, but if customers aren’t paying their invoices on time you will be running on empty. Each industry has its own average days sales outstanding (DSO), but one fact remains: the best way to increase cash flow is to reduce DSO.
WHAT IS DSO?
In order to reduce DSO, we need to start with a simple explanation of what it means. Your DSO is the average number of days a company takes to collect revenue after a sale has been made. So, you may have $70,000 in net credit sales, but if your average DSO is 52 days on a 30-day term policy, you should consider trying to reduce your DSO and speed up your customer payments.
A high DSO can have an effect on your cash flow in one obvious way. Studies show that the longer an account takes to pay their invoices, the less likely you will get the full amount, especially if that invoice is disputed. If you eventually have to refer that overdue invoice to a collection agency, you’re forking out more cash to get little in return. The longer the DSO, the less you’re getting paid in the long run.
HOW TO REDUCE DSO
There are a lot of actions you can take to reduce DSO. Coming up with a plan to enforce for every customer that takes too long to pay is the quickest and easiest way to reduce DSO. Here are 6 easy suggestions to get customers to pay quickly.
- Invoice your customers immediately. The longer you wait, the less urgent that invoice seems. Have a day each week that you go through invoices and send them out to customers, or do it as soon as the product or service has been delivered.
- Keep in touch with your customers by reminding them via email or a phone call that their invoice is due. Follow up if they still haven’t paid after a week with another reminder call.
- Automate your accounts receivables so that you receive automatic alerts when an invoice goes overdue. You can also set up workflows so you can easily see the furthest past due accounts and get in touch with them first.
- Create an incentive for your customer to pay. Companies will jump on a chance to save money. Offer a discount for those who can pay their invoice early.
- Penalize those who don’t pay. If a customer is consistently late on payments, introduce a late fine. Make sure that this is clear to all customers up front.
- Use different methods of payment. By offering online bill pay, you are more likely to get paid quicker instead of waiting for every customer to send a paper check through the mail.
Cash flow problems can quickly harm your business. The best way to get the money flowing more freely from customers is by reducing your DSO. By implementing those easy fixes, you can expect to get paid 20 percent faster.