Days Sales Outstanding (DSO) is a major account receivable (AR) KPI and goal for accounting departments. DSO increased for many companies over the past 18 months and remains a challenge in the economic recovery. Many customers experienced cash flow problems, and “stretched” their suppliers by paying late and allowing their Days Payable Outstanding (DPO) to remain at elevated levels.
DSO is an indicator of how much a company has tied up in accounts receivable, expressed in terms of the equivalent number of days of sales. When DPO at customers goes up, supplier DSO increases in tandem, cash flow goes down and unpaid accounts increase. Simply put, increasing collections and reducing DSO increases cash flow and reduces outstanding invoices.
Reducing and keeping DSO at an acceptable level directly impacts liquidity and your company’s ability to operate successfully.
Benefits of Increased Liquidity
Reducing DSO increases liquidity, or available cash assets. There are a number of benefits that result from increased liquidity.
- Timely Payments – With increased liquidity you are able to pay suppliers, employees and operating expenses on a timely basis, and keep your operations running smoothly. Liquidity is the lubricant that keeps business transactions flowing without delays caused by payment problems.
- Lower Borrowing – Increased liquidity reduces the need to borrow to finance accounts receivable and fund operations. Credit facilities are not tied up supporting working capital needs.
- Stronger Financial Position – Financial position is strengthened by increased liquidity, which in turn raises credit rating scores and makes it easier to obtain better terms from suppliers and credit from financial institutions.
- Increased Profitability and Return on Investment (ROI) – Improved liquidity increases profitability by reducing borrowing and operating costs. Increased liquidity improves ROI by lowering investment in accounts receivable and reducing borrowing and operating costs.
- Take Advantage of Opportunities – Increased liquidity makes it possible to take advantage of business opportunities. With increased liquidity you have the resources to go after new business or make investments that might not be possible if liquidity is constrained.
Reducing DSO makes it easier to operate your business efficiently and increase profitability and ROI.
AR automation reduces DSO and increases cash flow and liquidity. Automation increase efficiency and enhances customer experience. Through the elimination of spreadsheets and manual processes, streamlining workflows and administrative tasks, while ensuring every customer is contacted, you are able to influence every invoice and substantially reduce DSO.
With a connected accounting solution for your AR teams to coordinate with customers and vendors, you can go digital and enjoy the benefits of office automation. Lockstep is a leader in cloud-based, connected accounting, which can help you boost productivity and optimize cash flow.