This discount can be easily offset by speeding up cash flow, savings on loan fees and better discounts from creditors.No one wants to walk away from a customer, but do you know which customers are routinely inconsistent, unresponsive or continually paying invoices late despite offering outstanding services? Has your company considered dropping bad customers from your business list? DSO increases are often driven by a few large customers. Are you making it easy for your customers to pay and communicate with you? Check out Esker’s payment portal.Are you performing credit evaluations on all new customers? Are your credit terms appropriate and followed by your sales department? Does your customer service department flag new orders that do not have a completed credit app? Do you have a procedure in place for updating credit information on a regular basis?Are your invoices accurate and sent out on time? Are payment terms and due dates clearly written on invoices and any other communication sent out to the customer? Have billing addresses and accounts payable email addresses verified before bills are sent out? Do you provide incentives for early pay? Are you sending out automated payment reminders?Do you consistently follow up on customer disputes and late payments? Are you measuring performance against goals? Do you regularly review aging reports? Are you reporting on collections forecasting? Do you have an understanding as to why customers are paying late (e.g., invoice discrepancies, product issues, etc.)?Do you have a collections process in place? Do employees have the tools they need to prioritize, call and email collection efforts? Are they well trained? Do they have enough time to follow up on all past-due accounts? Are they able to efficiently keep sales and customer service in the loop on disputed invoices?Are you offering discounts? Do you offer incentives to customers to receive quicker payments, such as early payment discounts? For example, you could offer a discount for paying within a week or 10 days when your payment terms are net 30. Make it easier for your customer to do business with youOffering multiple payment methods — such as credit cards and automatic payments, or an online option for customers to view invoices and statements — provides greater flexibility for the customer and improved cash flow for you. Days sales outstanding or DSO indicates the number of days taken by the company to collect money from its customers. Days Payable Outstanding shows how well your firm is managing its accounts payable by measuring the average number of days it takes you to pay vendors.A high DSO has a tremendous impact on cash flow and revenue and can prohibit you from investing in your company’s growth. A days sales outstanding (DSO) of 15 means it takes 15 days to collect.Days Sales Outstanding shows how well your firm is managing its accounts receivable by measuring how long it takes to collect payments owed to your firm.
So as you can see in the image below, Target has 6 days sales outstanding.Conversely, luxury goods often come with payment plans. So you might expect Harley-Davidson to offer a financing program which would lead to longer DSO.Looking at their financial statements, you see that Harley-Davidson had a huge amount of Receivables at year-end, giving a DSO of 127 days in 2014.Different industries have very different structures. But for almost everyone, the goal is to shrink your DSO (unless, like Harley, you make money on financing your customers).If your average number is 60 days, can you shrink it to 45 days?If you can, you’re going to reduce those receivables by 25% (and turn it into cash you can use, which is never a bad thing!).To learn more about participating in an Income|Outcome simulation that will improve business acumen in your organization, click here to contact us.
By knowing how many days your sales are held up in receivables, you can evaluate your invoicing practices, credit terms, and financial projections on a more strategic basis. One key performance indicator (KPI) that provides particularly valuable insight: your DSO, or days sales outstanding.A DSO analysis can show you how effectively you’re collecting payment for your products or services, and how that relates to your company’s cash flow. > Click HereCompanies have quite a few ways to measure their Accounts Receivable performance. Empower your organization with automation that continues to get smarter over time. Depending on your position in your company, you might see a lot of sales revenue coming into the organization.
Architectural and engineering services (74.36 days) Automotive equipment rental and leasing (104.35 days) Technical and trade schools (109.32 days) Average DSO by IndustryAccording to SageWorks, there are a handful of industries for which a DSO of 60+ days is considered average.
DSO and Sales FluctuationsOn a similar note – the same way that it’s normal for certain industries to have “slow seasons”, it’s also normal for certain companies to have periods when their DSOs are higher than normal. If competitors typically have longer payment cycles, yours may very well be on the longer side as well it could simply be a side effect of your industry’s business model. Heavy and civil engineering construction (66.51 days)To put your DSO into perspective, be sure to consider the average expectations in your industry. Foundation, structure, and building exterior contracting (67.46 days)
For example, a major account that provides a larger share of a company’s revenue may be asked to pay within 60 or 90 days, while smaller accounts may be asked to pay more quickly. DSO by Customer BaseAnother thing to keep in mind: some companies choose to offer more lenient terms to larger customers. This is why most companies use a monthly (or quarterly) KPI, then compare their current number to the benchmark from the same period in the previous year.
Plus, the more sales you have to send to a collections agency, the more time (and money!) your company ends up wasting. Because you won’t have access to your profits right away, you’ll need to come up with a strategy for covering the costs of overhead while you wait for payment. The Problem with a High DSOIf your DSO KPI is too high, your cash flow will likely suffer. For instance, 36 days should be your maximum target if you request payment from a typical customer within 30 days.
Workflow Automation for Faster, More Efficient Accounts ReceivableIf your cash flow is typically strong, there’s no need to worry – even if your DSO is on the high side for your industry or company history. You can also take into account the number of days that pass from an invoice’s due date to the date it’s actually paid (your average days delinquent), the number of invoices you collected compared to the number of invoices you sent out (your collection effectiveness index), and the net value of your credit sales as they compare to your average accounts receivable balance (your accounts receivable turnover ratio). For instance, you can:For more in-depth strategies, check out our in-depth guide to reducing your DSO.Of course, DSOs are just one financial KPI for you to monitor.
Our Accounts Receivable solutions make it possible to invoice customers more quickly, reduce lead times, and gain more visibility into your entire order-to-cash cycle.Ready to improve your Accounts Receivable metrics? Contact us today to learn more about reducing your DSOs (and meeting other crucial KPIs) with strategic AR automation.
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