5 easy ways to reduce your DSO
All businesses must find ways to effectively manage accounts receivable (AR) to stay financially viable. Days sales outstanding (DSO) is an age-old metric that’s used to help companies gauge how well they’re doing just that. As you probably already know too well, when DSO is too high, businesses can struggle with poor cash flow and unpaid debt, which means less liquidity for things like expansion and investment.
With the wide range of technology tools available today, companies can more easily manage and reduce DSO, making them more agile and poised to take advantage of future opportunities. However, it’s important to realize that people and processes must change with new technologies to create sustainable change – especially in an area like AR.
In order to calculate your DSO, you first need to start by selecting a reporting period. It can be monthly, quarterly, or annually. Next, you’ll need to divide your AR balance for that reporting period by your total credit sales, and then multiply that total by the number of days in the reporting period. The final figure is your DSO.
According to CFO Magazine, the most efficient companies report a DSO of 30 days or less. Businesses with the longest DSOs reported figures just under 50 days, with the average DSO sitting around 36 days. If you’re well above this average, it may be time to look at reducing your DSO methodically in order to improve your cash flow. However, before embarking on a DSO reduction initiative, it’s important that your company takes a look at your specific industry’s average DSO and other factors that can affect this metric.
An article published by Inc. Magazine highlighted 10 industries where DSO was well above the median. For example, management consulting had a DSO of more than 125 days, and oil and gas companies, as well as technical and trade schools, had average DSOs of around 110 days. If you operate in one of these industries, you’ll need to adjust your DSO reduction goals to levels that are more comparable to industry standards and also more comparable to your competition.
In addition, some industries may experience seasonal DSO changes, which can affect shorter reporting period metrics. If that applies to your organization, be sure to measure DSO over a longer reporting period to obtain a more accurate number. Comparing year-over-year indicators will be more accurate than month-over-month metrics in such a situation.
Finally, remember that if you offer lenient terms to major clients, this can also affect your DSO calculations significantly. You may want to subdivide your data before setting overall DSO goals to ensure that your objectives can be met.
The first thing you need to do before working to reduce your DSO is to understand exactly what your current DSO levels are given your industry, competition, and any unusual client agreements. Setting these initial benchmarks will not only help you determine if your improvement efforts are successful, but will also give you a common ground to discuss with your management team.
Understanding where your company stands and exactly what it's trying to achieve in terms of reducing DSO will help keep everyone focused on the end goal. This can ensure that you receive both the support and resources you need to follow through with one or more of these ideas and initiatives.
Here are five easy ways that can help you reduce your DSO today:
Method #1: Incorporate More Automation
Although many organizations use accounting software suites to manage the financial side of their businesses, much of the overall accounts receivables process is often still paper-heavy and labor-intensive. In order to effectively reduce your DSO, you must incorporate as much automation as possible into your operational processes.
For example, if you’re still relying on a combination of spreadsheets and software systems that require manual re-keying of information, you’re at risk for human errors and long lag times. Reconciliation processes that require hunting for information and mistakes can direct staff attention away from higher-level, customer-focused activities such as managing disputes or improving the customer experience with better communication.
By using a cloud and blockchain-based payment solution like Paystand, you can eliminate repetitive processes and easily scale to manage a growing invoice volume. Automation means that invoices are sent to customers immediately, and digital payments are collected instantly with just the click of a button.
Method #2: Expand Payment Options and Links
Sometimes it can seem that customers are hunting for any excuse to avoid paying a bill. One thing you can do to ameliorate this is to reduce the number of possible excuses by expanding the payment options you can accept. If you can accept credit card payments, ACH, paper checks, and direct bank transfers, customers will be more likely to find a payment option that matches their preferences.
In addition, introducing digital flexibility, ease, and speed can help customers begin making the shift to paying in the ways you prefer to receive money. For example, the Paystand Bank Network is a partnership with more than 18,000 banks that offers zero-fee payment options. Consider offering a free, bank-to-bank transfer option alongside credit card options that carry a convenience fee to help cover your transaction costs, and you may be able to see a shift to payment options that will help you reduce your DSO further.
Ease of payment can be a big factor in reducing your DSO. Consider all the steps in an antiquated AR process: customers receive paper bills, they must find their payment method and write a check or fill in a credit card number, and they must mail in their payment. When you receive these paper checks or credit card numbers, they need to be managed by cashing checks or manually entering credit card numbers before cash is available. Each step can cause delays or errors.
When you automate your AR process and send digital invoices with a “pay now” button embedded into the communication, payment can be completed in one click if account numbers are saved. If reminders are needed, the same payment link can be embedded in every communication to customers, making it as convenient and easy as possible to take care of the invoice expediently. Reminders, emails, and the transactions themselves can be automated, which means funds are immediately transferred and available, keeping your DSO as low as possible.
Method #3: Be Creative With Payment Terms
Although it is generally accepted to offer 30-to-60-day payment terms to customers in many industries, there’s no reason that you can’t incentivize earlier payments. Customers are already accustomed to paying late fees if they remit invoices outside agreed-upon payment terms.
Getting payments faster benefits your organization, so it’s reasonable to share some of those advantages with early paying customers. For example, consider offering discounts for quick payments or rewarding those customers who consistently pay earlier with sneak peeks at new products or services or special rewards.
Be sure to communicate your payment terms clearly upfront, and also explain the benefits of paying early and the penalties for late payments to shape customer behavior.
Method #4: Use AI to Personalize Collections
Artificial intelligence (AI) and machine learning (ML) technologies can provide a wealth of data to help you personalize collections processes. For example, AI and ML can analyze a customer’s risk profile based on past behavior, payment history, communications preferences, and more.
By using this information, you can create more effective outreach based on payment terms, type of receivable, and particular categories. Automating the collection process in this way allows you to be more diligent about collecting past-due accounts with less effort, which leads to lower DSO.
Method #5: Prune High-Risk Customers
The bottom line is that customers who routinely fail to pay their bills are simply not good customers to have. Use your system to track those customers who regularly pay late or not at all, and especially clients who are unresponsive to outreach and communication efforts. Stop doing business with them.
Although this means potential lost income in the short run, your organization will save countless hours trying to manage those accounts and collect payments in the long run. That time can be better spent working with customers who have short-term payment issues, improving customer service for your best customers, or acquiring new customers that are more diligent about paying invoices on time.
As you implement one or more of these initiatives to reduce your DSO, remember that you’ll need to have continuous training, education, measurement, and recognition to keep your company focused on sustained change. It’s all too easy in a department like AR to return to comfortable, familiar ways of processing invoices and dealing with late-paying customers.
An organization must find ways to incentivize and reward its financial staff for implementing more efficient ways to operate in order to reduce DSO in a more permanent and sustainable way.
Ready to Learn More About How Paystand Can Help You Reduce DSO?
If you're interested in learning more about how Paystand’s solution can help you reduce DSO, reach out to us today. Our software helps you manage, optimize, and automate payments, providing all the tools to help you get paid faster. Schedule a free demo or call us anytime at 1-800-708-6413.