When calculating your own key metrics for accounts receivable, it’s important to understand how others are performing in DSO by your industry. If you’re in the technology sector, but comparing yourself to the construction industry, you’re going to think you’re doing REALLY well as the construction industry tends to have a very high average DSO. However, others in your industry might be collecting much faster than you, which leaves you behind in competition as you’ll have less cash flow to reinvest and grow your business.
The technology industry isn’t doing too bad, in comparison to the 10 industries with the worst DSO. On average, DSO for the tech industry sits around 42 days, which isn’t terrible, but could always have room for improvement. If you’re looking at a DSO that is significantly higher than this in the technology industry, it might be time that you take a deeper look at your collection process and reassess where there is room for improvement.
Having a high DSO isn’t just frustrating because you’re sitting around waiting. That high DSO can have negative impacts on your business in a couple ways.
First, when the money is sitting in your customer’s bank account and not yours, you have no way to pay your own bills. Just because your customer hasn’t paid you doesn’t mean your operational costs stop. You may have to look towards outside financing to fill the gap, which means you’ll also be paying interest. If you choose to refer the unpaid invoice to a collection agency, you’re then looking at a percentage of the payment going to the agency. These are a lot of costs on you just to deal with a customer who is not paying. It is guaranteed that you’re not actually getting paid what you’re owed in the end.
HOW TO LOWER YOUR DSO
- Invoice customers as soon as your work is done
- Automate your accounts receivable process so you know immediately when an invoice is past due
- Keep in constant contact with your customers
- Introduce late fees to customers who consistently pay late
- Be wary of who you extend credit to
- Offer electronic payments such as ACH or online portals
Lowering your DSO can have a huge impact on the rest of your business. By using some simple tips, you can bring your business above average.