DSO expansion can suck up the cash you need to operate and grow your business. If you are not careful you may end up in a cash trap that can lead to:
- Higher borrowing costs to finance DSO
- Insufficient cash to buy inventory and pay employees and operating expenses
- Inadequate cash to invest in and grow your business
- Insolvency and possible bankruptcy
Reducing DSO, as discussed in our previous article, can benefit your company by helping you to avoid a cash trap and its potentially damaging consequences.
But how do you manage accounts receivable to avoid a cash trap? What are the signs or leading indicators of a cash trap? What steps can you take to avoid DSO expansion that can lead to a cash trap?
Here are some ideas on what you should monitor and steps you can take to avoid a cash trap.
Percent Past Due
Don’t automatically assume that DSO expansion is due to an increase in past due accounts. Check the percentage of receivables past due first to see if this is the source of the problem.
If the percentage of receivables past due has not increased, or increased little in relation to the growth of DSO, then you need to reevaluate your payment terms. If you have different terms depending on the type of customer or product, etc. you may be have a greater mix of longer payment terms, or your sales department may be using terms more aggressively to increase orders. Whatever the reason, you need to find a balanced solution that meets market needs without putting your company in a cash trap.
On the other hand, if the percentage of past due receivables has increased then you need to concentrate your AR teams efforts on past due accounts.
Days Past Due
Monitor days past due to determine which accounts are contributing to DSO expansion. Identify which invoices are past due and by how much. Concentrate collection efforts on getting the major past due invoices paid.
An unusual increase in days past due can sometimes reveal unresolved disputes or a change in a customer’s financial condition, which may require additional follow up actions.
Cost of Credit
Calculate the cost of carrying past due accounts receivable by invoice. This is a great tool to help focus your AR team on collection priorities.
Accurate and Timely Information
Winning a war requires accurate and timely intelligence. Your AR team also needs accurate and timely reports to identify the reasons for DSO expansion and focus on the actions necessary to reduce it.
If you do not have automated accounts receivable, gathering and analyzing the data your AR ream needs frequently involves exporting data from an accounting system and using custom spreadsheets to calculate and analyze the data. This makes staying ahead of the curve on DSO expansion a challenge.
Automated accounts receivable solutions can give your AR team the real-time information it needs to identify the causes of DSO expansion so that efforts can be prioritized to reduce DSO.
The key to automating accounts receivable and reducing DSO 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 to automate your accounts receivable and reduce DSO.
If you would like to learn more about how you can benefit from automating your accounts receivable, please contact Lockstep Collect at www.lockstep.io.